Foreign Debt & Foreign Debt & Financial Crises Financial Crises
Dec 14, 2015
Foreign Debt & Foreign Debt & Financial CrisesFinancial Crises
A Nation’s Balance of Payment A Nation’s Balance of Payment
Balance of Payment IndicatorsBalance of Payment Indicators Merchandise TradeMerchandise Trade
trade in tangible goods between nationstrade in tangible goods between nations Service TradeService Trade
Trade in intangible goods, i.e., insuranceTrade in intangible goods, i.e., insurance Investment Income & PaymentInvestment Income & Payment
Interest & dividend paymentsInterest & dividend payments Remittances & Official TransactionsRemittances & Official Transactions
Migrant worker incomeMigrant worker income Cost paid to government employee Cost paid to government employee
overseasoverseas
A Nation’s Balance of Payment A Nation’s Balance of Payment
When Balance of Payment AppearsWhen Balance of Payment Appears It is viewed by realists as a sign of poor It is viewed by realists as a sign of poor
competitive performancecompetitive performance Adjustment measures to be taken:Adjustment measures to be taken:
Monetary policyMonetary policy Adjust the volume of money supplyAdjust the volume of money supply Central bank limiting public access to loans by Central bank limiting public access to loans by
raising interest rates, for exampleraising interest rates, for example Fiscal policyFiscal policy
Lower government spendingLower government spending Raises taxes to limit purchasing powerRaises taxes to limit purchasing power
Commercial policyCommercial policy Increase export & decrease importIncrease export & decrease import
A Nation’s Balance of Payment A Nation’s Balance of Payment
Basis of the Adjustment MeasuresBasis of the Adjustment Measures External adjustmentExternal adjustment
Impose most of the adjustment costs on Impose most of the adjustment costs on foreignersforeigners Apply tariffs, impose import quotas and export Apply tariffs, impose import quotas and export
subsidiessubsidies Devalue own currencyDevalue own currency
Internal adjustmentInternal adjustment Cool down domestic economyCool down domestic economy
Discourage spending by businesses & governmentDiscourage spending by businesses & government Levy higher taxes and increase interest ratesLevy higher taxes and increase interest rates
Discourage individual spendingDiscourage individual spending Unemployment, closure of businesses & fewer Unemployment, closure of businesses & fewer
government projectsgovernment projects
A Nation’s Balance of Payment A Nation’s Balance of Payment
Basis of the Adjustment MeasuresBasis of the Adjustment Measures Financing/BorrowingFinancing/Borrowing
Seek financing from external sourcesSeek financing from external sources Decrease own foreign exchange holdingDecrease own foreign exchange holding
A Nation’s Balance of PaymentA Nation’s Balance of Payment
Third Word Debt CrisisThird Word Debt Crisis
Signs of CrisisSigns of Crisis A liquidity problemA liquidity problem
Temporary debt problem: payments can be deferred Temporary debt problem: payments can be deferred and repaid later on terms acceptable to creditorand repaid later on terms acceptable to creditor
A solvency problemA solvency problem
Unsustainable debt problem: loss of credit for the debtor Unsustainable debt problem: loss of credit for the debtor unless the creditor reduces principal and interest unless the creditor reduces principal and interest paymentspayments
Debt crises may begin as liquidity problems turns into Debt crises may begin as liquidity problems turns into solvency problems. solvency problems.
A Nation’s Balance of PaymentA Nation’s Balance of Payment
Third Word Debt CrisisThird Word Debt Crisis
OriginOriginTime:Time: August 1981 August 1981
Main debtor countries (1982)Main debtor countries (1982)Country Debt $ Debt Service RatioCountry Debt $ Debt Service Ratio
(debte as of % of (debte as of % of export income)export income) Brazil: $92 bnBrazil: $92 bn 81.3%81.3% Mexico: $86 bnMexico: $86 bn 56.8%56.8% Argentina: $43 bn Argentina: $43 bn 50%50% Venezuela: $32 bnVenezuela: $32 bn 29.5%29.5% Korea: $37 bnKorea: $37 bn 22.4%22.4% Philippines: $24 bnPhilippines: $24 bn 42.6%42.6%
A Nation’s Balance of PaymentA Nation’s Balance of Payment
Third Word Debt CrisisThird Word Debt Crisis
Explaining the CrisisExplaining the Crisis Historical structuralists’ explanationHistorical structuralists’ explanation
Irresponsible lender behaviorIrresponsible lender behavior Over-lending by commercial banksOver-lending by commercial banks Northern governments encouraged private bank loans Northern governments encouraged private bank loans
to the Southto the South Liberal/Orthodox liberal explanationLiberal/Orthodox liberal explanation
The Southern countries borrow commercial bank loans The Southern countries borrow commercial bank loans to avoid IMF-imposed structural adjustment conditionsto avoid IMF-imposed structural adjustment conditions
Misuse of loans in poor projectsMisuse of loans in poor projects Reacted slowly to signs of problemsReacted slowly to signs of problems Poor economic development policies, e.g., Poor economic development policies, e.g.,
protectionist import substitution (do not embrace protectionist import substitution (do not embrace globalization) globalization)
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialism A continuing legacy of colonialism
Neo-colonialism Neo-colonialism Kwame Nkrumah & the Attack on Neo-Kwame Nkrumah & the Attack on Neo-
colonialismcolonialism Who was Nkrumah?Who was Nkrumah?
Leader of Ghana, 1st black African state Leader of Ghana, 1st black African state that gained independence (1957)that gained independence (1957)
Believing formal independence was the Believing formal independence was the condition for national development.condition for national development.
Nkrumah wrote Nkrumah wrote Neocolonialism: The Last Stage of Neocolonialism: The Last Stage of Imperialism Imperialism to explain why formal independence to explain why formal independence had failed to facilitate development.had failed to facilitate development.
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt CrisisInterpreting the Cause of Third Word Debt Crisis
A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism
Nkrumah Nkrumah Arguing that Lenin had failed to anticipate Arguing that Lenin had failed to anticipate
neocolonialismneocolonialism Neocolonialism had prevented prosperity Neocolonialism had prevented prosperity
of the newly independent statesof the newly independent states What’s neo-colonialism?What’s neo-colonialism?
States that are subject to neo-colonialism States that are subject to neo-colonialism are independent in theory; they have all are independent in theory; they have all the outward trappings of sovereigntythe outward trappings of sovereignty
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism What’s neo-colonialism?What’s neo-colonialism?
In reality, their eco system and thus their In reality, their eco system and thus their pol policy are directed from the outsidepol policy are directed from the outside
The aim of this external control was to The aim of this external control was to exploit, not to develop.exploit, not to develop.
Neo-colonialism is the worst form of Neo-colonialism is the worst form of imperialism. For those who practice it, it imperialism. For those who practice it, it means power without responsibility and for means power without responsibility and for those who suffer from it, it means those who suffer from it, it means exploitation without redress.exploitation without redress.
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism What’s neo-colonialism?What’s neo-colonialism?
““A state in the grip of neo-colonialism is A state in the grip of neo-colonialism is not master of its own fate.”not master of its own fate.”
Why did the industrialized nations need Why did the industrialized nations need neo-colonialism?neo-colonialism? Need to appease workers angered by the Need to appease workers angered by the
cumulative costs of WWI, the Depression, cumulative costs of WWI, the Depression, and WWIIand WWII
Need to build welfare states, but could not Need to build welfare states, but could not pay for it without continued exploitation of pay for it without continued exploitation of Africa and AsiaAfrica and Asia
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism Why did the industrialized nations need Why did the industrialized nations need
neo-colonialism?neo-colonialism? To pay for a welfare state, grant formal To pay for a welfare state, grant formal
independence to the former colonies while independence to the former colonies while maintaining enough external control to maintaining enough external control to continue exploitation.continue exploitation.
How did the industrialized nations How did the industrialized nations maintain control over the former colonies?maintain control over the former colonies? ““Free trade” made post-colonial states exporters of Free trade” made post-colonial states exporters of
primary products and importers of manufactured primary products and importers of manufactured goodsgoods
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism How did the industrialized nations How did the industrialized nations
maintain control over the former colonies?maintain control over the former colonies? Capital flows and interest rates were Capital flows and interest rates were
controlled by the rich countriescontrolled by the rich countries Political, military and cultural means for Political, military and cultural means for
maintaining controlmaintaining control Political, military and cultural means for Political, military and cultural means for
maintaining controlmaintaining control
A Nation’s Balance of PaymentA Nation’s Balance of PaymentThird Word Debt CrisisThird Word Debt Crisis
Objectives of Crisis ResolutionObjectives of Crisis Resolution Preventing collapse of int’l banking & financial systemsPreventing collapse of int’l banking & financial systems Restoring capital market access for the debtor countriesRestoring capital market access for the debtor countries Minimizing economic dislocation and restoring economic Minimizing economic dislocation and restoring economic
growth in debtor countriesgrowth in debtor countries
Measures for Achieving the ObjectivesMeasures for Achieving the Objectives Emergence measures & involuntary lendingEmergence measures & involuntary lending
Short-term emergency loans to Mexico, Brazil, and Short-term emergency loans to Mexico, Brazil, and VenezuelaVenezuela
Government and IMF pressured private banks to continue Government and IMF pressured private banks to continue to loan to debtor countriesto loan to debtor countries
IMF assumes more lending and pressures for adjustment of IMF assumes more lending and pressures for adjustment of the debtor coutriesthe debtor coutries
A Nation’s Balance of PaymentA Nation’s Balance of Payment
Third Word Debt CrisisThird Word Debt Crisis
Measures for Achieving the ObjectivesMeasures for Achieving the Objectives The Baker PlanThe Baker Plan
Postponement of some debt paymentsPostponement of some debt payments Provision of new loansProvision of new loans Changes in debtor country policiesChanges in debtor country policies
The Brady PlanThe Brady Plan Debt reduction or partial forgiveness of debtDebt reduction or partial forgiveness of debt Acceptance of IMF and World Bank conditionsAcceptance of IMF and World Bank conditions
The Heavily Indebted Poor Countries (HIPC) The Heavily Indebted Poor Countries (HIPC) initiativeinitiative
Reduction of debts of eligible countries to a Reduction of debts of eligible countries to a sustainable level sustainable level
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialism A continuing legacy of colonialism
Neo-colonialism Neo-colonialism Kwame Nkrumah & the Attack on Neo-Kwame Nkrumah & the Attack on Neo-
colonialismcolonialism Who was Nkrumah?Who was Nkrumah?
Leader of Ghana, 1st black African state Leader of Ghana, 1st black African state that gained independence (1957)that gained independence (1957)
Believing formal independence was the Believing formal independence was the condition for national development.condition for national development.
Nkrumah wrote Nkrumah wrote Neocolonialism: The Last Stage of Neocolonialism: The Last Stage of Imperialism Imperialism to explain why formal independence to explain why formal independence had failed to facilitate development.had failed to facilitate development.
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt CrisisInterpreting the Cause of Third Word Debt Crisis
A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism
Nkrumah Nkrumah Arguing that Lenin had failed to anticipate Arguing that Lenin had failed to anticipate
neocolonialismneocolonialism Neocolonialism had prevented prosperity Neocolonialism had prevented prosperity
of the newly independent statesof the newly independent states What’s neo-colonialism?What’s neo-colonialism?
States that are subject to neo-colonialism States that are subject to neo-colonialism are independent in theory; they have all are independent in theory; they have all the outward trappings of sovereigntythe outward trappings of sovereignty
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism What’s neo-colonialism?What’s neo-colonialism?
In reality, their eco system and thus their In reality, their eco system and thus their pol policy are directed from the outsidepol policy are directed from the outside
The aim of this external control was to The aim of this external control was to exploit, not to develop.exploit, not to develop.
Neo-colonialism is the worst form of Neo-colonialism is the worst form of imperialism. For those who practice it, it imperialism. For those who practice it, it means power without responsibility and for means power without responsibility and for those who suffer from it, it means those who suffer from it, it means exploitation without redress.exploitation without redress.
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism What’s neo-colonialism?What’s neo-colonialism?
““A state in the grip of neo-colonialism is A state in the grip of neo-colonialism is not master of its own fate.”not master of its own fate.”
Why did the industrialized nations need Why did the industrialized nations need neo-colonialism?neo-colonialism? Need to appease workers angered by the Need to appease workers angered by the
cumulative costs of WWI, the Depression, cumulative costs of WWI, the Depression, and WWIIand WWII
Need to build welfare states, but could not Need to build welfare states, but could not pay for it without continued exploitation of pay for it without continued exploitation of Africa and AsiaAfrica and Asia
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism Why did the industrialized nations need Why did the industrialized nations need
neo-colonialism?neo-colonialism? To pay for a welfare state, grant formal To pay for a welfare state, grant formal
independence to the former colonies while independence to the former colonies while maintaining enough external control to maintaining enough external control to continue exploitation.continue exploitation.
How did the industrialized nations How did the industrialized nations maintain control over the former colonies?maintain control over the former colonies? ““Free trade” made post-colonial states exporters of Free trade” made post-colonial states exporters of
primary products and importers of manufactured primary products and importers of manufactured goodsgoods
A Nation’s Balance of PaymentA Nation’s Balance of PaymentInterpreting the Cause of Third Word Debt Interpreting the Cause of Third Word Debt
CrisisCrisis A continuing legacy of colonialismA continuing legacy of colonialism
Neo-colonialism Neo-colonialism How did the industrialized nations How did the industrialized nations
maintain control over the former colonies?maintain control over the former colonies? Capital flows and interest rates were Capital flows and interest rates were
controlled by the rich countriescontrolled by the rich countries Political, military and cultural means for Political, military and cultural means for
maintaining controlmaintaining control Political, military and cultural means for Political, military and cultural means for
maintaining controlmaintaining control