to decrease their imports from Third World countries. As a result, Developing countries faced a direct need to increase their external borrowing so that they could at least cover their necessary domestic needs.High interest rates. An important percentage of the Third World Debt was borrowed under different interest rates. Therefore, the early 80’s rise in rates, caused a further aggravation in the payback obligations of the Third World. Having to face this critical situation, Third World countries had two main policy options. They would either minimize imports of goods and rely on their domestic products, as well as set development and industrial-growth aims, or support their increasing foreign debt through further borrowing. Lack of ability, and sometimes will, to follow the first option, many countries entered a vile circle of borrowing and paying. Since the beginning of the Third World debt crisis, many academic analysts have proposed a variety of ways to succeed debt relief over those countries. The two main opinions were that the LDC’s were facing either a liquidity or a solvency problem. 1.Followers of the liquidity view argued that the debt crisis was a short-term problem and proposed that indebted countries should be granted access to further external borrowing until they could succeed in balancing their debts.2.Followers of the solvency view, in contrast, tended to point at the fact that, that Third World highly indebted countries were unlike to repay their debts, for a large proportion of the money were not invested, but consumed. They suggested that ways should be fount in order to share the costs and lower the interest rates. Those early proposals have been proven though to inaccurate, for two main reasons:Firstly, countries are illiquid, and secondly, countries may be unwilling to repay the debts, if they were not given the proper incentives. A later view suggested that specific LDCs have ...
