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Title: Economics%20of%20Latin%20America%20


1
Economics of Latin America the Caribbean
2
LISTING OF LATIN AMERICAN COUNTRIES Argentina
Belize Bolivia Brazil Chile Colombia
Costa Rica Cuba Dominican Republic Ecuador
El Salvador Guatemala Honduras
Mexico Nicaragua Panama Paraguay
Peru Suriname Uruguay Venezuela (other)
French Guiana a colony LISTING OF CARIBBEAN
ISLAND NATIONS Anguilla - Antigua and Barbuda -
Aruba - Bahamas - Barbados - Bermuda - Cayman
Islands - Cuba - Dominica - Dominican Republic -
Grenada - Guadeloupe (French) - Guyana - Haiti -
Jamaica - Martinique (French) - Montserrat -
Netherlands Antilles - Puerto Rico - Saint Kitts
Nevis - Saint Lucia - Saint Vincent
Grenadines - Trinidad and Tobago - Turks and
Caicos Islands - Virgin Islands
3
  GDP valuation GDP per Income Poverty Human Environment Quality Annual
  based on PPP capita equality Index Development Performance of life economic
Country 2008 Current (PPP) (2001-06) 2005 2008 2008 2005 growth ()
  Billions USD   2008 USD Gini index   HPI-1    HDI EPI index 2007
                 
 Argentina 570.53 14,354.00 51.3 4.1 0.860 (H) 81.8 6.469 8.7
 Bolivia 43.45 4,332.00 60.1 13.6 0.723 (M) 64.7 5.492 4.6
 Brazil 1,975.90 10,298.00 57 9.7 0.807 (H) 82.7 6.47 5.4
 Chile 246.48 14,688.00 54.9 3.7 0.874 (H) 83.4 6.789 5.1
 Colombia 402.46 8,336.00 58.6 7.9 0.787 (M) 88.3 6.176 7.7
 Costa Rica 48.92 10,832.00 49.8 4.4 0.847 (H) 90.5 6.624 7.3
 Cuba N/A N/A N/A 4.7 0.855 (H) 80.7 N/A N/A
Dominican Republic 76.19 8,558.00 51.6 10.5 0.768 (M) 83 5.63 8.5
 Ecuador 104.67 7,518.00 53.6 8.7 0.807 (H) 84.4 6.272 2.5
 El Salvador 43.89 6,052.00 52.4 15.1 0.747 (M) 77.2 6.164 4.7
 Guatemala 66.84 4,899.00 55.1 22.5 0.696 (M) 76.7 5.321 5.7
 Haiti 11.68 1,292.00 59.2 59.2 0.521 (M) 60.7 4.09 3.2
 Honduras 32.67 4,085.00 53.8 16.5 0.714 (M) 75.4 5.25 6.3
 Mexico 1,550.26 14,581.00 46.1 6.8 0.842 (H) 79.8 6.766 3.2
 Nicaragua 16.75 2,704.00 43.1 17.9 0.710 (M) 73.4 5.663 3.8
 Panama 38.31 11,255.00 56.1 8 0.832 (H) 83.1 6.361 11.5
 Paraguay 29.34 4,767.00 58.4 8.8 0.752 (M) 77.7 5.756 6.8
 Peru 244.69 8,584.00 52 11.6 0.788 (M) 78.1 6.216 8.9
 Uruguay 40.66 12,707.00 44.9 3.5 0.859 (H) 82.3 6.368 7.4
 Venezuela 362.77 12,933.00 48.2 8.8 0.826 (H) 80 6.089 8.4
Notes (H) High human development (M) Medium human development Notes (H) High human development (M) Medium human development Notes (H) High human development (M) Medium human development Notes (H) High human development (M) Medium human development
4
  • Latin America Update (2010)
  • In the five years between 2004-2008 Latin
    Americas economies grew at an annual average
    rate of over 5.
  • Inflation remained generally low.
  • Credit expanded and exports boomed.
  • Proportion of people living in poverty fell from
    44 in 2002 to 33 in 2008.
  • Until the fall of 2008 Latin Americans could
    still hope that they would escape the worst of
    the downturn.
  • But in the last three months of 08, Latin
    America saw its stock markets crash, currencies
    wobble and credit start to dry up. That came on
    top of falling exports and the plunge in the
    prices of the commodities it sells to the world.
  • Estimate regional GDP declined 3.6 in 2009.

5
  • Remittances (money being sent home by Latin
    Americans working abroad) has fallen sharply.
  • Still, the region withstood the global economic
    decline better than had been anticipated in 2009,
    and is rebounding quickly.
  • The regional economic powerhouse, Brazil,
    continued to see strong inflows of foreign direct
    investment even while its economic output
    contracted 1.2.
  • The increase in commodity prices after March of
    2009 helped most Latin American countries.
  • As a whole, the OECD expects Latin American and
    the Caribbean to recover modestly in 2010 and
    2011, with growth of 2.2 and 3.2 respectively.
  • Growth in the English speaking Caribbean will be
    very weak to begin with, with growth returning to
    most of these economies only late 2010/early 2011
    (tourism).
  • Much will depend on what happens with the Global
    Economy in general and the US in particular, in
    the second half of 2010.

.
6
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7
  • Many fear that Latin America will revert to its
    dictatorial and populist past that was often
    characterized by the seizing of foreign assets
    along with fiscal and monetary irresponsibility.
  • This may be a concern for Venezuela, Bolivia and
    Ecuador, but throughout the region democracy has
    quickly formed deep roots.
  • Results from a October 2009 Latinobarómetro poll
    (left) indicates that the countries of Latin
    America may not only be diverging economically in
    the coming years, but we may witness political
    divergence as well.
  • Most Latin Americans see themselves as
    politically moderate, but they retain a yearning
    for strong leaders and expect the state to solve
    their problems.

8
  • Latin Americans generally support democracy and
    its institutions, although many remain frustrated
    by the way their political systems work in
    practice (weak rule of law, widespread corruption
    and cronyism).
  • General risks
  • Biggest risk in the region is of abandoning the
    recent commitment to fiscal and monetary
    prudence.
  • While most of the poorest are nowadays covered
    by government cash-transfer programs, those in
    the third to the fifth deciles of income
    distribution are now at risk of falling back
    into, or going deeper into, poverty.
  • Corruption is still a major obstacleand may
    worsen in the short run.
  • Update on the Caribbean
  • On October 15th, 2008 in Barbados, 13 Caribbean
    countries approved a new Economic Partnership
    Agreement (EPA) with the European Union.
  • The EPA involves only gradual changes to a
    trading relationship which goes back to colonial
    days. It grants almost all Caribbean exports
    duty-free and quota-free access to Europe. In
    return, the Caribbean will phase out duties on
    87 of European imports by 2033.

9
Trade between US and Caribbean Countries Trade between US and Caribbean Countries Trade between US and Caribbean Countries
Millions of US (2007) US Exports Nations Imports
Antigua and Barbuda 240 9
Bahamas 2,473 523
Barbados 457 40
Belize 234 113
Dominica 84 2
Grenada 83 9
Guyana 188 147
Jamaica 2,318 789
St. Kitts and Nevis 203 61
St. Lucia 166 36
St. Vincent and Grenadines 69 1
Suriname 306 136
Trinidad and Tobago 1,779 9,342
Dominican Republic 6,091 4,328
Haiti 711 500
Cuba 447 0
Aruba 529 3,070
Bermuda 660 24
Netherlands Antilles 2,082 810
  • Until late 2008 these countries have had
    one-way access to European market (since 1975
    under the Lomé Convention, and its successor, the
    Cotonou agreement)
  • Pattern of trade relations between Europe and
    the Caribbean was no longer in synch with the
    rules of the WTO.
  • The agreement will help the Caribbean to develop
    new exports, and to rely less on old staples like
    bananas and sugar.
  • US is still the largest trading partner with,
    and investor in, the region.
  • Still, the most dynamic business opportunities
    in the coming decade will be between countries in
    the region and the EU.
  • The big story for 2010 may be Cuba.

10
CORRUPTION PERCEPTIONS INDEX 2008 CORRUPTION PERCEPTIONS INDEX 2008 CORRUPTION PERCEPTIONS INDEX 2008
country country 2008 CPI
rank country score
109  Argentina 2.9
102  Bolivia 3
80  Brazil 3.5
23  Chile 6.9
70  Colombia 3.8
47  Costa Rica 5.1
65  Cuba 4.3
102  Dominican Republic 3
151  Ecuador 2
67  El Salvador 3.9
96  Guatemala 3.1
177  Haiti 1.4
126  Honduras 2.6
72  Mexico 3.6
134  Nicaragua 2.5
85  Panama 3.4
138  Paraguay 2.4
72  Peru 3.6
23  Uruguay 6.9
158  Venezuela 1.9
Each year, Transparency International draws on
surveys of businessmen and country experts to
gauge perceptions of corruption in 180 countries
around the world. It defines corruption as the
abuse of public office for private gain. This
year, Chad shared the bottom slot with
Bangladesh. Corruption has declined significantly
over the past year in a number of countries,
including France, Hong Kong, Taiwan and
Nigeria. Transparency International
11
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12
  • The Puzzle of Latin America Economic Development
    Diversity, Trends and Conflict
  • The nations of Latin American and the Caribbean
    are engaged in programs of political and economic
    liberalization that may prove as historic as
    their struggles for independence from Spain and
    Portugal.
  • After decades of political instability,
    corruption, and military dictatorship, many
    countries in the region seem to be developing
    stable democracies.
  • Markets long protected from competition are
    opening to foreign trade, foreign investment, and
    regional cooperation.
  • Issue 1 The Economic Landscape
  • Diversity The nations of Latin America are
    different from each other in many ways. Many of
    them also have a large amount of diversity within
    themselves.
  • Regional trends Changing from a rural to an
    urban society, an increase in population, and new
    found deposits of natural resources. The
    countries have instituted different types of
    political structures and domestic policies.

13
  • The five major issues that confront Latin
    American countries today
  • External Balance
  • Credibility
  • Distribution
  • Sustainability
  • Role of the State
  • The net effect of the reforms initiated in the
    1980s and 1990s may very well result in a
    divergence among the nations of Latin America
    over the next 25 years.
  • Those that successfully address these five issues
    will see their peoples fortunes rise, while
    those that fail will experience sub-par economic
    growth and political instability.
  • The importance of running a consistent balance of
    payments surplus gt boost reserve of domestic
    financial capital. Role of national savings rate.

14
  • What is the difference between economic growth
    and development?
  • Authors definition of development a process
    of meeting the basic human needs of the
    population and enhancing options for the
    allocation of economic resources both today and
    in the future to increase the choices citizens
    have in their daily lives.
  • UN Millennium Development Goalspgs. 14-15
  • Role of technological change the world
    technology frontier.
  • Human Development Index
  • Dualism gt the rich become richer and the poor
    more destitute in the process of change (without
    access to resources, the poor often become
    poorer)
  • the simultaneous existence of modern and
    traditional economics.
  • complicates the policymakers task (must
    address the social deficit).
  • Todaro growth must be accompanied by a
    change in the economic and social rules of the
    game.
  • Therefore, economic growth is a necessary, yet
    not sufficient, condition for economic
    development.

15
The Human Development Index (HDI) is an index
combining normalized measures of life expectancy,
literacy, educational attainment, and GDP per
capita for countries worldwide (ranges from 0 to
1 with green being greater than .85, yellow
between .85 and .5 and red below .5)
16
  • Growth of output must outstrip population growth
    to improve the resources available to people.
  • Tasks of policymakers in designing development
    policy
  • They must establish a delicate balance between
    the external sectors and domestic macro policy.
  • They must be attentive to the changing nature of
    the global economic environment as well as
    preserve confidence and stability within their
    own economies.
  • To attain equitable growth, they must fashion
    policies to target different economic, ethnic,
    and gender groups.
  • Their policies must balance the allocation of
    resources between meeting the needs of the
    present as well as future generations (i.e.
    sustainable development).
  • Must face the challenge of deciding the extent to
    which each state should supplement the activities
    of its own markets to facilitate equitable,
    sustainable development.

17
  • Three basic schools of thought Development
    Theory
  • Planning Model
  • a. Dependency theory Center vs. Periphery
  • 2. Institutionalist Model
  • a. Structuralistsasymmetric development
    (bottlenecks)an economy also shaped by power and
    politics.
  • b. Heterodox theorya flexible approach
  • 3. Orthodox Model
  • a. Chicago Schoolgrounded neoclassical
    economics
  • b. Washington Consensus
  • c. IMF

18
  • Issue 2 Historical LegaciesPatterns of Unequal
  • Unsustainable Growth 
  • What were the Spaniards main goal in coming to
    the New World?
  • What kind of social and political system did
    they set up?
  • Difference between peninsulares and creoles?
  • Imperial trade restrictions.
  • What is the meaning of the terms mercantilism,
    monoculture and Dutch Disease?
  • Agricultural development workers labored on a
    debt peonage structure gt the latifundios
    (production for the world market the best land
    the encomieda system ltrepartida quintogt) and
    minifundios (subsistence farming marginal
    land). Model of self-sufficiency (feudal concept
    of manor).
  • Why was Brazil overlooked by the Spanish?
  • Independence and entry into the world economy
    Most nations gained independence in the early
    1800s. Followed by a period of turmoil
    territorial disputes. In the 1840s, Latin America
    began to enter the world trade market, especially
    with Great Britain.

19
  • What was The Golden Age (1870-1914)?
  • The Golden Age occurred in Latin America between
    1870-1914 and was so called because of the
    increased demand for exports, the tremendous
    growth in population and new transportation
    technology.
  • Stalled Progress (1914-1930) During this
    period, the U.S. replaced Great Britain as the
    primary trading partner and investor of Latin
    America. Export led growth slowed during this
    period because of falling prices and because of
    World War I scissors effect Engles Law.
  • The 1930s (the Great Depression) The main
    causes of problems in Latin America were capital
    flight, contracting income because of declining
    export prices, insular multinationals, lack of
    forward and backward linkages from prior
    development.
  • The 1930s was a political watershed period in
    Latin America with its "increased social
    pressure, numerous strikes, the emergence of
    radical parties, and nationalist rhetoric." A new
    development model emerges.
  • Issue 3 Theories, Ideas, and Opinions
  • Divergent Opinions The major economic problems
    plaguing Latin America are low incomes, unequal
    income distribution, periods of hyperinflation,
    negative balance of payments and periodic debt
    crises.

20
  • Many of the proposed policies are radical because
    the problems are so extreme that it appears minor
    changes in policy will not work.
  • Why is Latin America underdeveloped?
  • Dependency theory periphery? center?
  • Harsh critics of foreign direct investment and
    MNCs .
  • 2. Mainstream interpretations
  • Resource endowmentglobal geography.
  • The conventional, mainstream economists say that
    underdevelopment is caused by small market size,
    slow capital accumulation (low domestic savings),
    shortages of foreign exchange, unskilled labor,
    and poor political organization (inefficient
    public institutions).
  • Late out of the gate no agricultural revolution,
    lack of an investment climate, needed
    transportation revolution, imperial opposition,
    opposition from within difficult to catch up
    from behind.
  • Three positive effects from foreign direct
    investments and MNCs?
  • Foreign firms bring superior technology.
  • Increases competition in the host economy.
  • Foreign market access.

21
  • Concepts to Define Understand at the Beginning
  • 1. Comparative advantage - def A nation has a
    comparative advantage over a trading partner in
    the production of an item if it can produce that
    item at a lower unit cost than its partner.
  • Implications...
  • a. Any country can increase its income by
    trading, because the world market provides an
    opportunity to buy some goods at relative prices
    that are lower than those which would prevail at
    home in the absence of trade.
  • b. The smaller the country the greater this
    potential gain from trade, but all countries
    benefit to some extent.
  • A country will gain most by exporting commodities
    that it produces using its abundant factors of
    production most intensively, while importing
    those goods whose production would require more
    of the scarcer factors of production.
  • 2. Balance of Payments - Exports (X) Imports
    (M)
  • B of P PxX PmM
  • Px vector of prices of exports
  • Pm vector of prices of imports

22
  • Surplus excess of exports over imports
  • Deficit excess of imports over exports
  • Merchandise trade account, capital account,
    reserve account
  • Engles Law again gt deteriorating terms of
    trade over time.
  • 3. Exchange rates - def The price of one
    nation's monetary unit in terms of the monetary
    unit of another country.
  • - Foreign exchange market A market in which
    buyers and sellers of bank deposits denominated
    in the monetary unit of many nations exchange
    their funds.
  • - Exchange rates can be allowed to fluctuate
    freely, can be "managed" or can be pegged to the
    currency of a major trading partner.
  • gt Graph (500p1 or 1p.002)
  • Demand side - People who want to import Chilean
    goods, or travel in Chile, or others who just
    want to hold pesos.
  • When North Americans demand more Chilean
    vegetables, copper, wine, or whatever, (D curve
    shifts right) the price of the peso will rise in
    terms of dollars.

23
Supply side - those who want to import goods into
Chile from the United States or hold . (1) When
Chileans demand more US cars or computers (S
curve shifts right) the price (in ) of the
Chilean peso will tend to decline (S of peso
shifts r). Appreciation and depreciation of a
currency When country A's currency becomes more
valuable relative to country B's, country A's
currency is said to appreciate relative to that
of country B and country B's currency is said
to depreciate relative to that of country
A. Determinants of Exchange Rates 1. What
determines the relative positions of SD curves
for currency? (a) Relative price levels -
constantly changing (inflation) (b) Relative
rates of growth (c) Relative interest - rate
levels (d) Expectations/Speculation Example of
Argentina
24
  • (e) Random daily trade and financial flowsnoise
    (3.8 trillion per day)
  • Note Market exchange rates vs. PPP rates
    (purchasing power parity).
  • 4. Domestic Absorption (A) The national
    expenditures on both home-produced goods and
    imports.
  • - Not equal to B of P...
  • If AgtGDP gt trade deficit
  • If AltGDP gt trade surplus
  • How does a nation pay for domestic consumption
    (absorption) above and beyond GDP? gt Draw down
    domestic savings, sell domestic assets and/or
    borrow from abroad (increase external debt).
  • 5. Import Substitution Industrialization
    development strategy - The substitution of
    domestic production for imports of foreign
    manufactures.
  • Was first explored by Latin American countries
    when their primary exports markets were severely
    disrupted, first by the Great Depression of the
    1930s and subsequently by the breakdown of
    commercial shipping during World War II.
  • What are forward and backward linkages?

25
The Big Mac Index (7/2009) The Big Mac index is
based on the theory of purchasing-power parity.
Under PPP, exchange rates should adjust to
equalize the price of a common basket of goods
and services across countries. Our basket is the
Big Mac. Video Clip
26
  • - Emerging from the war with fledgling
    industries, countries like Argentina, Brazil,
    Columbia, and Mexico began systematically to
    sustain these manufactures by erecting tariffs
    and other barriers to trade-competing imports
    from the US.
  • Latin America developed import substitution
    regimes with a multitude of protective techniques
    that were later emulated by other developing
    countries.
  • Conditions for success
  • (1) Identify large domestic markets, as indicated
    by substantial imports over the years.
  • (2) Ensure that the technologies of production
    can be mastered by local manufacturers or that
    foreign investors are willing to supply
    technology, management, and capital (joint
    ventures).
  • (3) Erect protective barriers - Either tariffs or
    quotas on imports, to overcome the probably high
    initial cost of local production and make it
    profitable for potential investors in the target
    industries (infant industry argument).
  • First targets gt Consumer goods industries
    (processed foods, beverages, textiles, clothing,
    and footwear) have technologies easily obtained
    and mastered by domestic producers.

27
  • (4) Keep an overvalued exchange rate gt Imports
    are cheap (intermediate inputs are cheap) and
    exports are expensive to foreigners (reduced
    dependence of foreign markets for economic
    well-being Foreigners just won't buy your
    products).
  • (5) SOEs and why? Key industries vs. natural
    resources (p. 62).
  • (6) Role of MNCs? Subject to restrictions (p.
    67).
  • Marked change in national economic policy began
    in the 1950s
  • Following the end of the WWII, most Latin
    American governments formulated clear policies to
    foster "import-substituting industrialization".
  • - Governments improved the region's transport
    system and expanded the infrastructure for
    electricity and water.
  • - Governments helped finance local industry and
    welcomed foreign corporations willing to
    establish factories in certain industries.

28
- Still the strategy failed to resolve the Latin
American tendency to import more than it could
export. - In fact the import strategy
contributed to the problem because the new
factories were dependent on foreign suppliers for
machines, spare parts and intermediate
products. - As the policy ran its course,
domestic markets became exhausted... if economic
growth was to be sustained at home, then foreign
debts had to be incurred (keep political
promises). (4) Eventually, many developing
nations faced a breakdown (run out of loans and
must reduce exchange rates). - When this
occurred the wealthy and powerful were the first
to know domestic currency will exchange into a
larger number of foreign currency per unit.
Economic reality gt the national currency must
depreciate gt Capital flight Causes the domestic
currency to depreciate rapidly. In other words
this strategy ended with a crisis. - Devaluation
typically reduces imports and increases exports
but in the import trade strategy environment, the
dependency on imported goods made the demand for
foreign goods inelastic gt imports did not fall
yet became more expensive to obtain. - Also,
reducing imports would mean reduced employment
(populist politicians would not accept) gt net
result worsening of the balance of
payments/foreign exchange problems.
29
  • a Government felt compelled to borrow as much
    as possible from external sources (plus to print
    money to pay their domestic bills).
  • (5) In addition, levels of efficiency in the new
    industrial plants were sometimes rather low due
    to limited size of the home market.
  • Many producers used technology designed to
    produce high volumes of output (higher than Latin
    American countries could support)
  • Many firms operated at capacity levels below
    50!
  • (6) Under the ISI regimes governments introduced
    productive tariffs and quotas (or total ban on
    certain imports) to protect domestic producers
    and in some instances domestic producers had
    monopoly status gt little incentive to improve
    management or labor practices so the prices of
    local manufactures rose well above international
    prices.
  • a Also, very powerful domestic interests
    resisted dismantling tariffs and quotas that
    protected their favored status.

30
(7) Next, the rate of job creation was much lower
than had been hoped for - largely because of
the rapid growth of the labor force (from both
urban migration and high rates of population
increase). - Also, the problem was made worse
because the technology incorporated in domestic
industry was often capital-intensive even though
more labor-intensive techniques were
available. (8) Finally, the import-substitution
strategy and associated domestic growth was
bound to slow down eventually because of small
markets without hope of exports (due to
overvalued exchange rate). but it worked for a
while (5.5 growth 1950 1980) 6. Export
oriented trade policy development strategy
(outward looking trade strategy or the
neoliberal agenda) - Allows a nation to
realize, as fully as possible, the inherent gains
from their comparative advantage through free
markets. - Often means primary-export-led
growth (drawbacks volatile price swingsand
limited revenue upside due to Engels Law). -
Starting in the 1960s there were the beginnings
of an intellectual return to free trade thinking
and attempts were made to encourage Latin
American countries to export more to the
developed countries.
31
- Stimulus here was the budding success of the
Asian Tigers or NICs (Newly Industrialized
Countries Hong Kong, Korea, Singapore and
Taiwan) who were successfully penetrating MDNs
(More Developed Nations) markets. - Encouraged
by the advice of the World Bank, several
governments including those of Brazil and
Colombia began to reduce levels of domestic
protection and to give incentives to export
producers. a By 1970 this had become an
accepted way of sustaining industrial
expansion. Conditions for Success (1) Maintain
an exchange rate that helps make it profitable
for domestic producers to sell their crops,
manufactures, and services on world markets. The
lower the exchange rates, the more desirable the
nations products will be to foreigners. As
exchange rate decreases gt exports rise while
imports fall gt goal to get nation to run a
balance of payments surplus gt give them foreign
currency to service and reduce external
debt. (2) It may be necessary to subsidize some
exports to induce manufacturers and farmers to
invest in capacity for the export market (infant
industry argument again).
32
  • (3) If governments want producers to turn towards
    world markets, they must reduce the relative
    attractiveness of production for the domestic
    markets gt reduce high protective tariffs for
    favored industries, eliminate quotas on imports
    and reduce regulations.
  • Hyperinflation - Inflation (absolute increase in
    price level) at very high rates of usually 200
    percent or more prevailing for at least one year
    (table on page 108).
  • Caused by one factorgovernment printing too
    much money to pay its bills (Seniorageor,
    quantitative easing).
  • Why is it bad?
  • A. Uncertainty and therefore higher risk gt less
    investment (both from domestic and international
    sources). Induces the outflow of financial
    capital and reduces FDI. The poor flee to
    dollars.
  • B. Functions of money destroyed... store of
    value, unit of accounting, unit of exchange.
  • No lubricant to machinery of economy gt
    frictiongt slows down (people revert to barter).
  • C. Encourages speculation... Diverts effort away
    from production.

33
D. But why do it? Effectively a tax without
increasing official tax rates government uses
money right after it is printed thereby using it
when it has the greatest purchasing power...
those who receive it later have reduced
purchasing power therefore have transferred,
unknowingly, some of the purchasing power which
would have been theirs to the government
(inflation tax). especially impacts the
poor. it is not understood, so most citizens
dont blame government. E. Solution... New
currency or abandon currency (...El Salvador and
Ecuador have done plus the US accepted almost
everywhere). 8. The International Monetary Fund
(IMF) What is it? - International role of IMF is
to extend emergency credit (Short Term!) to
member nations who get in trouble. - Criticsgt
IMF tool of MDNs lying in wait to get control of
the nation's economic policies and reshape them
in a monetarist, market oriented, conservative
model. - Problem Has had a standard package
that includes 1 Monetary Fiscal restraint.
34
Monetary restraint reduces domestic demand and
reins in inflation (also ties politicians hands
so they cant use seniorage). Government
spending reduced (reduce size and involvement of
government). Create fiscal prudence by bringing
the federal budget in balance. 2 Currency
Devaluation Goal Reduce excess demand and to
reorient the structure of national production
away from imports and toward exports (with low
import content a comparative advantage often
focused on labor intensive manufactured goods and
primary products). also reduces appeal of
capital flight. 3 Cut subsidies and other
trade impediments (tariffs, quotas, rules
regulations) gt open up economy to global market
forces. 4 Limit on wage rate increases in
countries with high inflation there are also
price controls to help break inflation psychology
structural inflation Argentina, Brazil and
Peru. 5 Overhaul tax structure to reduce
loopholes for wealthy and to make more efficient.
Note Theres been little progress on this one.
35
  • - All subject to periodic review If they
    haven't followed guidelines they lose additional
    funding or must accept and even more stringent
    set of guidelines.
  • gt funding is received in installments over
    period of the loan.
  • Capital flight A rapid and massive conversion of
    domestic currency for that of a major
    international reserve currency and movement of
    that reserve currency out of the country to an
    off-shore financial haven.
  • - When devaluation is about to occur, the
    wealthy and powerful are the first to know.
  • - The overvalued exchange rate means that just
    before crisis point the domestic currency will
    exchange into a larger number of foreign currency
    per unit.
  • - Economic reality gt the national currency must
    depreciate gt capital flight helps to depreciate
    the domestic currency rapidly in a short period
    of time (depletion of reserve account).
  • - This often creates volatile financial markets,
    increases risk, increases interest rates, social
    unrest and reduces economic growth.
  • - It is also followed by a period of inflation
    ( actually stagflation).
  • - Psychology imbedded in wealthy Latin culture
    to have one financial foot in and one financial
    foot out of home country (keep a house and bank
    account in Miami).

36
  • Evaluating and Comparing Economies
  • Need some definitions before we go on...
  • Institution Institutions are rules of the
    society that structure the interaction among
    people.
  • - Are made up of formal rules and regulations.
  • - And informal rules as well at times (important
    in LA!).
  • - They are the informed ways by which people deal
    with each other every day ? norms of behavior.
  • - Institutions, collectively, are the framework
    within which all of human interaction...
    political, social and economic... takes place.
  • Economy The economy of a society is comprised of
    institutions that perform economic functions.
    These institutions are structured and behave
    according to established working rules.
  • Philosophical Basis for an Economy A viewpoint
    which specifies the place of an individual within
    society an ideal state of political, social and
    economic reality to serve as a set of ultimate
    goals for society and a general program
    suggesting broad policy measures that will guide
    society from its actual conditions toward the
    ideal reality. This economic philosophy will be
    multidimensional in the sense that social,
    political, and cultural, as well as economic
    elements are contained therein.

37
1. Capitalism ? Adam Smith - dominance of "the
invisible hand" in guiding economic activity.
Limited role of government (provide public goods
and define the rules of the game). A process
ideology. B. Institutional Economics 1. While
there is no hierarchy of importance in the tenets
of institutional economics, one of the most
important for our purposes is that... a
Economies are fluid rather than static. b The
second tenet is that one can understand an
economy only within its historical context. -
The constellation of factors shaping an economy
is unique. - A corollary to this tenet is that
what might work for one nation might not work
for some other due to historical
inconsistencies. c Third, the values of a
nation's people can be understood best by
studying the philosophical/religious
underpinnings of its culture. - Old and new
philosophies alter attitudes that may
subsequently lead to a change in work rules and
therefore institutions.
38
d A fourth general tenet is that the values,
institutions and work rules which operate in one
nation will not necessarily function in another
nation. - A corollary tenet is that values,
institutions and work rules which functioned in
the past may not function in the future. G. C.
Allen "One of the most common fallacies in the
minds of academics, or the citizenry of a nation,
is that once a trend is established it will
persist indefinitely." e Finally, the basic
structure and performance of an economy are
influenced by the dynamics of the society's
social and political structure. 4. This broad
theory is based upon the interrelationship
between a society's beliefs, power structures,
and working rules of institutions. a The
theory can be used to explain the nature and
evolution of economic systems. b Changes in
working rules can modify institutions or create
new ones, with the economy evolving in the
process. c The philosophical basis accepted by
authorities and the economy's performance
determines whether the working rules are
retained, modified, or replaced.

39
  • 5. Working rules...
  • - Establish the boundaries of economic activity
    between institutions.
  • 6. Principal institutions...
  • - Socially determined not inherent.
  • a Instrumental in establishing and coordinating
    most production and distribution patterns of
    behavior, and giving meaning and durability to
    routine activities.
  • b Significant features Origin, the activities
    participants perform, working rules governing
    them, their impact on the economy, and the
    philosophical basis for these activities and
    rules.
  • 7. Behavior of the economy...
  • - Three components How it is organized to
    resolve the economic problem(s) (what, when, how,
    for whom), institutional change, and performance.
  • In describing how each society is organized to
    resolve its economic problem, three questions
    need to be addressed

40
1. How is the resource allocation decision
organized... a Centralized (state control) or
decentralized (markets) or some combination.
Decision making rules and institutions. 2. What
are the rules regarding ownership and control
over productive resources? - In each economy the
rules differ...even where similar, differing
restrictions exist. 3. What type of social
process has been adopted for coordinating
information and for making production and
distribution decisions? - Including markets,
traditional mechanism, or some form of economic
planning. II. Evaluating and Comparing
Economies - The performance of an economy is
influenced by goals and priorities established by
authorities and by environmental factors such as
technology, natural resource endowment, and
international economic and political factors...
all interrelate.
41
- How the economy performs, relative to stated
goals and priorities (prevailing norm), determine
which other economic, social or political
policies are necessary. - Evaluating and
comparing economies cannot be purely
objective. Conclusions influenced by the
analysts point of view... the comparors
norm. A. Evaluating the performance of an
economy... 1. An economy's performance can be
defined in many ways, depending upon the
performance criteria, methods of measurement and
weights attached to each criterion when overall
performance is calculated (the performance
index). - The choice of criteria is up to the
analyst (you!). 2. Four steps to follow a. The
analysts definition of performance. b. The
identification of performance criteria. c. The
choice of performance indicators for each
criterion.
42
  • d. The compilation of a performance index for
    cross-comparisons.
  • Includes weighting - must be made explicit
    (you will not be expected to do this)
  • e. Need for a benchmark country.
  • 3. Criterion examples
  • Economic growth (change in GDP or GDP per
    capita)
  • Economic stability (low inflation, stable
    exchange rate, low unemployment, lack of
    deficits, etc.)
  • International balance of trade, external debt,
    and currency values
  • Income distribution... Lorenz Curve (Gini
    Coefficient)
  • World Atlas of Income Inequality
  • Quality of life e.g. Human Development Index
    (United Nations)
  • other indices Corruption, Competitiveness,
    Economic Freedom

43
Approach in writing a course paper on a country
(ideal) Mexico 1. Introduction. Start with
overview of country/issue plus some current
statistics.
44
  • Population 108.7  m (2007)
  • Population growth 1.2 (average, 2003-2007)
  • Land area 1.9m sq km (about three times the
    size of Texas)
  • Currency Mexican peso (Ps) 12.95 pesos to the
    dollar (Feb. 2010)
  • GDP US bn market exchange rate
    893.4 US bn purchasing power parity 
     1,345.8
  • GDP growth 3.3 (average, 2003-2007)
  • GDP per head GDP per head (US market
    exchange rate)   8,219
  • GDP per head (US purchasing power parity) 
     12,381
  • Inflation  4.2 (average, 2003-2007)

45
  • BackgroundMexico was ruled by the Partido
    Revolucionario Institucional (PRI) and its
    predecessor, the Partido Revolucionario Nacional
    (PRN), between 1929 and 2000. Once strongly
    nationalist and interventionist, the leaders of
    PRI governments in the 1990s embraced free-market
    policies and economic liberalization. Following
    the victory in July 2000 of Vicente Fox Quesada,
    the presidential candidate of the centre-right
    party, the Partido Acción Nacional (PAN), changes
    to the political system are slowly taking place.
    The PRI remained the largest party in Congress
    during the Fox years, but it became less
    enthusiastic about free-market policies. Current
    president Felipe Calderon (PAN).
  • Political structureThe political system is
    presidential, bicameral (Senate and Chamber of
    Deputies) and federal (32 states). The president
    is elected every six years Mr. Calderon took
    office in December 2006. The 500 members of the
    Chamber of Deputies are elected every three
    years, 300 from single-member districts and 200
    by proportional representation. Three-quarters of
    Senate members are elected directly for a
    six-year term with the remaining one-quarter
    elected by proportional representation.

46
Key indicators Forecasts 2007 2008 2009 2010 2011 2012
Real GDP growth () 3.3 2.3 1.6 3.4 3.8 3.6
Consumer price inflation () 4 5.2 5.2 3.6 3.4 3.3
Commercial banks' prime rate (av ) 7.6 8.3 8.5 7.1 7.4 7.4
Current-account balance ( of GDP) -0.6 -1.1 -1.2 -1.5 -1.6 -1.4
Major exports 2007    of total   Major imports 2007    of total 
Manufactures   80.7   Intermediate goods   72.9 
Maquiladora   44.7   Maquiladora   34.2 
Oil   15.8   Consumer goods   14.8 
Agricultural products   2.8   Capital goods   12.3 
Leading markets 2007    of total  Leading suppliers 2007    of total 
 US   82.1   US   49.6 
Canada   2.4   South Korea   10.5 
Spain   1.5   China   5.8 
Germany   1.3   Japan   4.
47
  • 2. History be brief.
  • - philosophical basis (prevailing norm)
  • - identify principal institutions in the social,
    political and economic spheres
  • - discuss notable working rules of these
    institutions
  • 3. Methodology (more on this below) Explicitly
    state your comparors norm contrast with
    prevailing norm. Define your performance
    criteria, consistent with your comparors norm,
    and provide the data on your chosen country/issue
    and your benchmark country.
  • 4. Behavior/Analysis of economy (recent).
  • 5. Evaluation from point of view of your
    performance criteriabenchmark country for
    comparison.
  • 6. Conclusion
  • - what can you now say about this country/issue?
  • do some forecasting where are things going
    from here?
  • 7. Footnote/Endnotes

48
  • I have already chosen Mexico as my primary
    country
  • My benchmark country will be Argentina.
  • Comparors norm I think the standard of living
    is important and strongly correlated with good
    social indicators (healthy diet, access to health
    care, good sanitation, access to education,
    etc.). Since inflation has been a problem in the
    pastand can devastate purchasing powerthat
    stable, relatively low inflation is a must to
    maintain a productive economic environment.
    Finally, to compete in the global economy I think
    access to technology is crucial for the people.
  • Performance criteria The amount of income per
    person in real dollar/peso terms will measure
    standard of living. The change in national prices
    each year will measure inflation. Finally, the
    availability and spread of advance technology
    will lead to the ability to compete in the global
    marketplace.
  • Performance indicators
  • 1. Inflation, GDP deflator (annual )
  • 2. GNI per capita, PPP (current international )
  • 3. Fixed line and mobile phone subscribers (per
    1,000 people)

49
       
         
Year Mexico (Inflation GDP deflator) Mexico (Percent change from previous year) Argentina (Inflation GDP deflator) Argentina (Percent change from previous year)
1995 37.87 --- 3.17 ---
1996 30.74 -18.83 -0.05 -101.66
1997 17.69 -42.47 -0.46 784.99
1998 15.39 -13.02 -1.71 267.53
1999 15.09 -1.91 -1.84 7.70
2000 12.10 -19.80 1.04 -156.48
2001 5.88 -51.43 -1.10 -205.64
2002 6.96 18.34 30.56 -2888.45
2003 8.49 21.98 10.50 -65.65
2004 6.10 -28.09 9.19 -12.48
2005 8.80 44.22 5.50 -40.13
2006 13.50 53.41 4.40 -20.00
2007 14.10 4.44 3.20 -27.27
Mexican Inflation in Comparison to Argentina's
Mexican Inflation in Comparison to Argentina's
50
       
  Comparison to Argentina's Comparison to Argentina's Comparison to Argentina's  
Year Mexico (per capita GNI) Mexico (Percent change from previous year) Argentina (per capita GNI) Argentina (Percent change from previous year)
1995 6,690.81 --- 10,178.24 ---
1996 7,058.22 5.49 10,811.49 6.22
1997 7,551.75 6.99 11,742.87 8.61
1998 7,898.89 4.60 12,189.31 3.80
1999 8,208.48 3.92 11,815.08 -3.07
2000 8,815.06 7.39 11,850.38 0.30
2001 8,885.24 0.80 11,482.92 -3.10
2002 8,976.73 1.03 10,299.60 -10.31
2003 9,136.73 1.78 11,306.55 9.78
2004 9,644.73 5.56 12,525.94 10.78
2005 10,420.00 8.04 11,180.00 -10.75
2006 11,670.00 12.00 11,970.00 7.07
2007 12,990.00 11.31 12,580.00 5.10
Mexican Gross National Income per capita (in
current international dollars PPP)
51
 
       
  ...in Comparison to Argentina's ...in Comparison to Argentina's ...in Comparison to Argentina's  
Year Mexico (Fixed line and mobile) Mexico (Percent change from previous year) Argentina (Fixed line and moblile) Argentina (Percent change from previous year)
1995 104 --- 171 ---
1996 106 2.18 193 12.55
1997 117 10.03 236 22.75
1998 139 19.07 273 15.41
1999 193 38.60 323 18.35
2000 270 39.54 390 20.68
2001 358 32.63 399 2.36
2002 406 13.47 379 -4.96
2003 454 11.87 433 14.12
2004 545 19.98 579 33.75
2005 820 50.58 650 12.29
2006 1050 28.05 740 13.85
2007 1260 20.00 840 13.51
Mexican fixed line and mobile phone subscribers
(per 1000 people)
52
  • Mexico (United Mexican States)
  • Capital Mexico City 8.5 million people.
  • Ethnic makeup 60 mestizo, 30 amarindian, 9
    white, 1 others.
  • Much of Mexico's territory is vulnerable to
    earthquakes and volcanic activity. In 1943, for
    example, a cornfield in one of Mexico's richest
    agricultural zones sprouted a volcano instead of
    maize. In 1982, a severe volcanic eruption in the
    south took several hundred lives, destroyed
    thousands of head of livestock, and buried crops
    under tons of ash. Thousands of people died when
    a series of earthquakes struck Mexico City in
    1985.
  • Mexico is a nation of climatic extremes.
    Much-needed rains often fall so hard that most of
    the water runs off before it can be absorbed by
    the soil. When rains fail to materialize, crops
    die in the fields. The harsh face of the land,
    the unavailability of water, and erosion limit
    the agricultural potential of Mexico. Only 10 to
    15 percent of Mexico's land can be planted with
    crops.

53
  • Mexico's central region has the best crop-land.
    It was here that the Aztecs built their capital
    city, the foundations of which lie beneath the
    current Mexican capital, Mexico City.
  • For decades, Mexico City has acted as a magnet
    for rural poor who have given up attempts to eke
    out a living from the soil.
  • - The size and location of Mexico City have
    spawned awesome problems (the worst smog in the
    Western Hemisphere, traffic congestion is among
    the worst in the world, essential public
    servicesincluding the provision of drinkable
    water, electricity, and sewershave failed to
    keep pace with the city's growth in population).
  • Mass communication has had an incalculable
    impact on culture. - Television commercials
    primarily use models who are ethnically European
    in appearancepreferably white, blue- eyed, and
    blonde. As if in defiance of the overwhelmingly
    mestizo character of the population (success has
    become associated with light skin).
  • - Television, however, has helped to educate the
    illiterate Some Mexican soap operas, for
    instance, incorporate educational materials.

54
  • Literacy is portrayed as being essential to one's
    success and well-being.
  • Compadrazgo ("co-godparenthood" or
    "sponsorship") is found at all levels of Mexican
    society and in both rural and urban areas.
  • - It is a device for building economic and
    social alliances that are more enduring than
    simple friendship. Furthermore, it has a
    religious dimension as well as a secular, or
    everyday, application (informal rules of
    society).
  • - The chaos of city life, the hundreds of
    thousands of migrants uprooted from rural
    settings, and the sense of isolation and
    alienation common to city dwellers the world
    over are in part eased by the Hispanic
    institution of compadrazgo.
  • - Compadrazgo performs many functions, including
    providing assistance from the more powerful to
    the less powerful and, reciprocally, providing
    homage from the less powerful to the more
    powerful (reaches across class lines and knits
    the various strands of Mexican society
    together).

55
  • As Mexico City has sprawled ever wider across
    the landscape, multitudes of new neighborhoods
    have been created. Many are the result of
    well-planned land seizures, orchestrated by
    groups of people attracted by the promise of the
    city.
  • - Technically, such land seizures are illegal
    and a primary goal of the colonos (inhabitants
    of these low-income communities) is
    legitimization and consequent community
    participation.
  • - Beginning in the 1970s, colonos pursued their
    demands for legitimization through protest
    movements and demonstrations, some of which
    revealed a surprising degree of radicalism.
  • - In response, the Mexican government adopted a
    two-track policy It selectively repressed the
    best-organized and most radical groups of
    colonos, and it tried to co-opt the remainder
    through negotiation. In the early 1980s, the
    government created "Citizen Representation"
    bodies, official channels within Mexico City
    through which colonos could participate.

56
  • The Border
  • Driven by poverty, unemployment and lack of
    opportunity many Mexicans have chosen the United
    States as the place to improve their lives (2009
    estimated at 8.8 million).
  • During WWII the presidents of both nations
    agreed to allow Mexican workers, called braceros,
    to enter the US as agricultural workers.
  • Regardless, each year hundreds of thousands of
    undocumented Mexicans illegally cross the border
    in search of work (estimated at 4 to 6 million
    at any given time).
  • For the Mexican government this is a blessing
    since such mass emigration is a sociopolitical
    safety valve and results in an inflow of dollars
    sent home by workers (remittances).
  • Still, the US has attempted to stem the flow by
    negotiating treaties so that US companies and
    Mexican states along the border would profit from
    the creation of assembly plants (maquiladoras).
  • Low wages and lax labor and environmental law
    enforcement has resulted in US firms gaining
    profits while the Mexican government reaps the
    benefits of employment and tax dollars.

57
  • Mexicos Stability
  • Depends on the ability of the ruling elite to
    maintain a state of relative equilibrium among
    the multiplicity of interests and demands within
    the nationand to reign in the drug gangs.
  • Process characterized by bargaining among elites
    with various views of politics, social injustice,
    economic policy, and the conduct of foreign
    relations.
  • The 1910 Revolution (1910-1917) resulted in the
    Mexican Constitution A remarkable document in
    that it covers not only political rights but
    economic rights as well (e.g. 8-hour work day,
    minimum wage, 6-week paid leave for pregnant
    women, etc.)
  • Unfortunately, many of the provisions of the
    1917 Constitution have yet to be achieved.
  • Indian problem they have long endured the
    unequal practices of a ruling white and mestizo
    elite.
  • Land reform focus of struggle and occasion for
    serious human rights abuses.
  • Drug gangsorganized, wealthy, powerful and
    violent.

58
  • Even today, paramilitary bands and local police
    controlled by political bosses or landowners
    routinely threaten and/or kill peasant activists.
    The further south you go in the country, the more
    acute this problem (Chiapas Oaxaca).
  • Institutional Revolutionary Party (PRI)
    controlled the federal government from 1929 to
    2000 and set policy and controlled all levers of
    political power.
  • Paternalistic and all-powerful, the state
    controlled the bureaucracies that directed the
    labor unions (powerful), peasant organizations,
    student groups, and virtually every other
    dimension of organized society.
  • Even though the PRI lost the presidency in 2000,
    it remains the most powerful political party.
  • The PRI lost power because a series of economic
    crises alienated the upwardly mobile
    middle-class.
  • In 2000 Vicente Fox headed a coalition of
    parties that adopted the name Alliance for Change
    and promised Mexicos electorate Revolution of
    Hope he promised to be a citizen president.

59
  • Economic Crisis
  • In the 1970s the PRI undertook economic
    policies designed to foster rapid and sustained
    economic growth (import substitution).
  • Borrowed heavily to fund and achieved economic
    growth of 8.
  • Backed by its vast deposits of petroleum, the
    PRI recklessly borrowed to expand its economic
    infrastructure.
  • Petroleum prices plunged in 1981-82 debt
    crisis. By the end of 1982 40 of Mexicos export
    earnings were devoured in interest payments on a
    debt of 80bil.
  • IMF set as a condition for emergency funding a
    drastic reduction in state spending ? layoffs,
    reduced spending on social welfare programs.
    Devastated the poor and reduced the standard of
    living of the middle class.
  • In December 1994 the economy collapsed after the
    government could no longer sustain an overvalued
    peso.
  • The peso fell 50, while the stock market fell
    38. Ushered in another round of public austerity
    (Pres. Zedillo) and was the final ingredient in
    bringing down the PRI.

60
  • US engineered a bailout by backing (attached
    loan guarantees Brady bonds) a new issuance of
    Mexican government bonds.
  • NAFTA (1992) hope was that it would shore up
    the Mexican economy and generate jobs. It has for
    Mexico so that now Mexico is the third largest
    trading partner of the US. A new trade agreement
    between Mexico and the EU signed in 2000.
  • Resulted in the globalization of Mexico.
  • Analysts have noted that NAFTA has contributed
    to a trend toward more representative government
    and that globalization has undercut the
    state-centered regime of the PRI.
  • Still, there are far to many Mexicans who live
    below the poverty level. Of the 40 million poor,
    18 million are characterized as living in
    extreme poverty (less than 2 a day).
  • Income distribution is skewed with the richest
    20 in control of 58 of the nations wealth
    while the poorest 20 control only 4.
  • Questions on Mexico?

61
  • Chapter 4 Latin Americas Debt Crisis The
    Limits of External Financing
  • The debt crisis in Latin America was a
    development crisis.
  • The reasons for a debt crisis include
  • A chronic deficit in the non-interest current
    account balance.
  • A rise of import costs or a decrease in export
    earnings.
  • World capital markets lose confidence capital
    inflows dry up.
  • Borrowing is not necessarily bad (investment vs.
    current consumption).
  • Definition of a Debt Crises A debt crisis arises
    when countries fail to meet their interest and/or
    principal payments.
  • There are three ways to service national debt
  • First, the non-interest current account can be
    brought into a surplus balance.
  • Obtain newly borrowed money from international
    sources in order to cover old debts.
  • Other capital inflows such as from foreign
    direct investment.
  • Note Overvalued exchange rates and capital
    flight contribute to debt crises.
  • ? Over-invoicing of imports and under-invoicing
    of exports?
  • Causes foreign asset accumulation but goes
    into black market.

62
  • The 1980s Debt Crisis
  • Gradual failure of ISI policies during late 60s
    and early 70sgt need for external money to
    support.
  • Yom Kipper war gt OPEC raises price of oil gt
    stagflation in developed countries gt OPEC money
    floods Eurocurrency market gt growth looked
    relatively good in Latin America because of ISI
    insulation gt money flowed in from Europe gt
    feeding virtuous cycle of growth.
  • US Federal Reserve acted to stop inflation (80
    81) gt drained money from US system gt caused
    interest rates to skyrocket gt US economy went
    into a sharp contraction gt Latin exports to US
    tumbled gt balance of payments quickly
    deteriorated and economies stalled.
  • Currency overvaluation and capital flight during
    1978-1982 contributed to the debt crisis.
  • Mexico 1982 (OPEC loses controloil prices
    drop).
  • ? Brazil, Argentina and Venezuela got into
    similar trouble shortly thereafter.
  • ? A sovereign guarantee
  • ? external debt to exports or debt service to
    export ratio (table 4.6)
  • ? Other terminology in box on page 90.

63
  • Many nations were unable to sustain positive net
    exports and struggled under the dead weight of
    ISI gt political and economic inertia gt The Lost
    Decade
  • Debt Crisis Management
  • What was "the muddling-through strategy?
  • Assumed that debtors would regain their
    credit-worthiness with a combination of internal
    adjustment and more favorable world economic
    conditions.
  • Assumes problem is a liquidity not a structural
    problem.
  • Wrong! Led to depressed living conditions,
    hyperinflation, sharply reduced investment, and
    reduced long term growth rates.
  • What is conditionality?
  • Debt-equity swaps.
  • Debt for nature swaps.
  • Buybacks of debt.
  • Debt facilities organized by creditor governments
    (Paris Club).
  • Relief on interest payments rather than principle.

64
  • 7. Provisioning increased private financial
    sector set aside profits before dividend payments
    against risky loans (protects capital base in
    case of client default).
  • 8. Development of secondary market for developing
    country debt (Mexico ? .51 on each dollar of
    outstanding debt Peru (1987) ? .02 to .07 to
    the 1)
  • 9. The Baker Plan (October, 1985)
  • Plan to jump-start regional growth.
  • Premise countries in region could not repay
    external debts in the context of contractionary
    policies (IMF conditionality). Plan was to shift
    debt crisis policy from austerity to growth.
  • Targeted 15 LDCs for 29 billion of new money
    (20 from banks and 9 from IMF/World Bank).
  • Was a formal recognition that the problems were
    structural rather than of a liquidity nature ?
    caused policy shift at IMF to tie future loans to
    growth targets.
  • Still, it was too little too late money spread
    too thinly to have major impact (almost 1
    trillion of debt involved).

65
  • 9. The Brady Plan first proposed in 1985 but
    didnt get underway until 1989.
  • Asked banks to forgive part of their loans to
    debtor countries in exchange for limited
    guarantees of repayment of remaining outstanding
    debt.
  • Three options
  • 1 decrease face value of debt (sanctioned
    buy-back in secondary markets)
  • 2
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