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Foreign Debt & Foreign Debt & Financial Crises Financial Crises
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Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

Dec 14, 2015

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Page 1: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

Foreign Debt & Foreign Debt & Financial CrisesFinancial Crises

Page 2: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 3: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 4: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 5: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 6: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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.

Page 7: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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%

Page 8: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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)

Page 9: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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.

Page 10: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 11: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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.

Page 12: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 13: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 14: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 15: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 16: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 17: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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.

Page 18: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 19: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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.

Page 20: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 21: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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

Page 22: Foreign Debt & Financial Crises. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods.

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