The 1980s 'Debt Crisis'

- Falling demand in the 1960s coupled with the Arab/Israeli war caused the price of oil to rise by 500% by OPEC countries in 1973.

- Huge profits from oil sales (petro-dollars) were made in OPEC countries.

- These countries couldn't spend the profits fast enough so they deposited much of the money into western banks, where the interest rates were higher.

- Banks needed to lend the money out in order to make more profit, so they lent it to willing borrowers in LEDCs.

- Economic recession in MEDCs led to a reduced demand for loans due to economic uncertainty.

- The banks faced a problem as neither individuals not industries were inclined to borrow money, so they lowered the interest rates dramatically to encourage borrowing.

- Money was invested in large-scale prestige projects and infrastructure schemes (dams, industrialisation programmes, transport networks), especially in LEDCs who couldn't afford them before.Corruption was widespread, as was economic mismanagement.

- In the early 1980s, Reagan and Thatcher, in the USA and UK, introduced a neo-liberal monetary policy which increased interest rates in order to reduce inflation. High interest rates initially reduced demand for borrowing in the West.

- LEDCs who had borrowed large sums of money  in the 70s were hit by huge rises in interest rates. Added to which, the markets they had been exporting to collapsed under economic recession, so they couldn't sell their goods and pay back loans.

- Prices of raw materials dropped in response to reduced demand.

- Many debtor countries had no choice but to accept new loans from institutions like the IMF and World Bank in order to pay back the initial loans. However, strict conditions wee imposed called Structural Adjustment Programmes (SAPs).