FUNDS FLOWS BETWEEN DEVELOPED AND DEVELOPING
COUNTRIES, AND IMPLICATIONS FOR THE ANALYSIS OF THE INTERNATIONAL POLITICAL ECONOMY
An external deficit develops for a country when the claims of foreign entities on the country's economy exceed the claims of entities in that country on the economies of other countries. A country's external debt is comprised of loans to both government and private sector organizations in the country. Loans to government entities involve sovereign risk, while loans to all other entities involve enterprise risk.
Loans involved in a country's external debt are extended by other governments, by international organizations (primarily the International Monetary Fund and The World Bank), and by private sector lenders in other countries (primarily banks, but also by investors who buy bonds and other debt obligations). The International Monetary Fund (IMF), however, plays a special role in this loan activity, because it, for the most part, establishes the rules of the game for all parties, as well as extending loans on its own (Lipson, 1985, pp. 201 202).
In the 1970s, the developing countries required capital for development, and they had populations clamoring for some of the economic benefits enjoyed by the residents of the developed countries. At that same time, commercial banks in the developed countries were awash in money (Kahler, 1985, pp. 11 13). The successful strategies of the Organization of Petroleum Exporting Countries (OPEC) in the 1970s had resulted in the transfer of enormous volumes of money from the developed countries to the OPEC countries. The OPEC countries required safe havens for their newly acquired capital, and banks in the developed countries provided those havens. The banks in the developed countries, after acquiring the OPEC money, needed borrowers for massive amounts of capital. The union of OPEC money and developing countries, with western banks as marriage brok...