ABSTRACT
Developing countries have had a difficult relationship with the international financial system. At the center of these difficulties lies a seemingly inexorable boom-and-bust cycle. The cycle typically starts with changes in international capital markets that create new opportunities for developing countries to attract foreign capital. Wanting to tap into foreign capital to speed economic development, developing countries exploit this opportunity with energy. Eventually, developing countries accumulate large foreign debt burdens and are pushed toward default. Looming default frightens foreign lenders, who refuse to provide new loans and attempt to recover many of the loans they had made previously. As foreign capital flees, developing countries are pushed into severe economic crises. Governments then turn to the International Monetary Fund (IMF) and the World Bank for assistance and are required to implement far-reaching economic reforms in order to gain those organizations’ aid. This cycle has repeated itself twice in the last 25 years, once in Latin America during the 1970s and 1980s, and once in Asia during the 1990s. A similar, though distinct, cycle occurred in sub-Saharan Africa. The political economy of North-South financial relations focuses on this three-phase cycle of overborrowing, crisis, and adjustment.
