Foreign Debt & Financial Crises

1. Foreign Debt & Financial Crises

2. A Nation’s Balance of Payment Balance of Payment Indicators • Merchandise Trade • trade in tangible goods between nations • Service Trade • Trade in intangible goods, i.e., insurance • Investment Income & Payment • Interest & dividend payments • Remittances & Official Transactions • Migrant worker income • Cost paid to government employee overseas

3. A Nation’s Balance of Payment When Balance of Payment Appears • It is viewed by realists as a sign of poor competitive performance • Adjustment measures to be taken: • Monetary policy • Adjust the volume of money supply • Central bank limiting public access to loans by raising interest rates, for example • Fiscal policy • Lower government spending • Raises taxes to limit purchasing power • Commercial policy • Increase export & decrease import

4. A Nation’s Balance of Payment Basis of the Adjustment Measures • External adjustment • Impose most of the adjustment costs on foreigners • Apply tariffs, impose import quotas and export subsidies • Devalue own currency • Internal adjustment • Cool down domestic economy • Discourage spending by businesses & government • Levy higher taxes and increase interest rates • Discourage individual spending • Unemployment, closure of businesses & fewer government projects

5. A Nation’s Balance of Payment Basis of the Adjustment Measures • Financing/Borrowing • Seek financing from external sources • Decrease own foreign exchange holding

6. A Nation’s Balance of Payment Third Word Debt Crisis Signs of Crisis • A liquidity problem Temporary debt problem: payments can be deferred and repaid later on terms acceptable to creditor • A solvency problem Unsustainable debt problem: loss of credit for the debtor unless the creditor reduces principal and interest payments Debt crises may begin as liquidity problems turns into solvency problems.

7. A Nation’s Balance of Payment Third Word Debt Crisis Origin Time:August 1981 Main debtor countries (1982)Country Debt $ Debt Service Ratio (debte as of % of export income) • Brazil: $92 bn 81.3% • Mexico: $86 bn 56.8% • Argentina: $43 bn 50% • Venezuela: $32 bn 29.5% • Korea: $37 bn 22.4% • Philippines: $24 bn 42.6%

8. A Nation’s Balance of Payment Third Word Debt Crisis Explaining the Crisis • Historical structuralists’ explanation • Irresponsible lender behavior • Over-lending by commercial banks • Northern governments encouraged private bank loans to the South • Liberal/Orthodox liberal explanation • The Southern countries borrow commercial bank loans to avoid IMF-imposed structural adjustment conditions • Misuse of loans in poor projects • Reacted slowly to signs of problems • Poor economic development policies, e.g., protectionist import substitution (do not embrace globalization)

9. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • Kwame Nkrumah & the Attack on Neo-colonialism • Who was Nkrumah? Leader of Ghana, 1st black African state that gained independence (1957) Believing formal independence was the condition for national development. • Nkrumah wrote Neocolonialism: The Last Stage of Imperialism to explain why formal independence had failed to facilitate development.

10. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • Nkrumah • Arguing that Lenin had failed to anticipate neocolonialism • Neocolonialism had prevented prosperity of the newly independent states • What’s neo-colonialism? • States that are subject to neo-colonialism are independent in theory; they have all the outward trappings of sovereignty

11. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • What’s neo-colonialism? • In reality, their eco system and thus their pol policy are directed from the outside • The aim of this external control was to exploit, not to develop. • Neo-colonialism is the worst form of imperialism. For those who practice it, it means power without responsibility and for those who suffer from it, it means exploitation without redress.

12. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • What’s neo-colonialism? • “A state in the grip of neo-colonialism is not master of its own fate.” • Why did the industrialized nations need neo-colonialism? • Need to appease workers angered by the cumulative costs of WWI, the Depression, and WWII • Need to build welfare states, but could not pay for it without continued exploitation of Africa and Asia

13. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • Why did the industrialized nations need neo-colonialism? • To pay for a welfare state, grant formal independence to the former colonies while maintaining enough external control to continue exploitation. • How did the industrialized nations maintain control over the former colonies? • “Free trade” made post-colonial states exporters of primary products and importers of manufactured goods

14. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • How did the industrialized nations maintain control over the former colonies? • Capital flows and interest rates were controlled by the rich countries • Political, military and cultural means for maintaining control • Political, military and cultural means for maintaining control

15. A Nation’s Balance of Payment Third Word Debt Crisis Objectives of Crisis Resolution • Preventing collapse of int’l banking & financial systems • Restoring capital market access for the debtor countries • Minimizing economic dislocation and restoring economic growth in debtor countries Measures for Achieving the Objectives • Emergence measures & involuntary lending • Short-term emergency loans to Mexico, Brazil, and Venezuela • Government and IMF pressured private banks to continue to loan to debtor countries • IMF assumes more lending and pressures for adjustment of the debtor coutries

16. A Nation’s Balance of Payment Third Word Debt Crisis Measures for Achieving the Objectives • The Baker Plan • Postponement of some debt payments • Provision of new loans • Changes in debtor country policies • The Brady Plan • Debt reduction or partial forgiveness of debt • Acceptance of IMF and World Bank conditions • The Heavily Indebted Poor Countries (HIPC) initiative • Reduction of debts of eligible countries to a sustainable level

17. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • Kwame Nkrumah & the Attack on Neo-colonialism • Who was Nkrumah? Leader of Ghana, 1st black African state that gained independence (1957) Believing formal independence was the condition for national development. • Nkrumah wrote Neocolonialism: The Last Stage of Imperialism to explain why formal independence had failed to facilitate development.

18. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • Nkrumah • Arguing that Lenin had failed to anticipate neocolonialism • Neocolonialism had prevented prosperity of the newly independent states • What’s neo-colonialism? • States that are subject to neo-colonialism are independent in theory; they have all the outward trappings of sovereignty

19. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • What’s neo-colonialism? • In reality, their eco system and thus their pol policy are directed from the outside • The aim of this external control was to exploit, not to develop. • Neo-colonialism is the worst form of imperialism. For those who practice it, it means power without responsibility and for those who suffer from it, it means exploitation without redress.

20. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • What’s neo-colonialism? • “A state in the grip of neo-colonialism is not master of its own fate.” • Why did the industrialized nations need neo-colonialism? • Need to appease workers angered by the cumulative costs of WWI, the Depression, and WWII • Need to build welfare states, but could not pay for it without continued exploitation of Africa and Asia

21. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • Why did the industrialized nations need neo-colonialism? • To pay for a welfare state, grant formal independence to the former colonies while maintaining enough external control to continue exploitation. • How did the industrialized nations maintain control over the former colonies? • “Free trade” made post-colonial states exporters of primary products and importers of manufactured goods

22. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis • A continuing legacy of colonialism • Neo-colonialism • How did the industrialized nations maintain control over the former colonies? • Capital flows and interest rates were controlled by the rich countries • Political, military and cultural means for maintaining control • Political, military and cultural means for maintaining control