Transcript Chapter 13

Chapter 13
Balance of Payments – Deficits and Debt
Debt Crisis of 1980’s
• Find information on current account and capital
account (IMF or Wikipedia)
• External debt is accumulated when
o
Domestic saving rates are low
o
Current account deficits are high
o
Imports of capital are needed for industrialization
• Debt servicing costs are high
Dimensions of LDC debt burden
•Debt to GDP ratio
1970
13.3
1980
24.4
1990
37.8
2000
37.3
2005
28.7
Debt-service ratio (as a % of exports)
1970
13.5
1980
13.2
1990
9.4
2000
23.0
2005
14.9
Reasons for debt-crisis (1980’s)
• Oil-prices high during 1974-1979
• Growth rates in DC fell affecting outward looking policies
(export) of LDC’s
• Fear of painful stabilization policy – avoided IMF
• Heavy borrowings from commercial banks and private
sector lenders
• External debt of LDC’s doubled from $180 billion (1975) to
$406 billion (1979)
• 40% of the debt was non-concessional
• Countries affected – Brazil, Argentina, Mexico – IMF
Stabilization Program
Asian Crisis of 1997
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Property bubble
Banks failed
Currency values fell by 33%
IMF bailout of South Korea, Thailand, Indonesia ,and
Philippines
Basic Transfer Equation
FN = dD
(13.1)
Where, FN = net capital inflow
D = total accumulated foreign debt
d = rate of increase of total debt
BT = dD = rD = (d – r) D
BT = Basic Transfer
rD = total interest payments
Thus, basic transfer is simply the net capital inflow minus interest
payments
BT will be positive if d > r
BT will be negative if r > d
Basic Transfer Equation
•
In the early stages of debt accumulation,
o LDC’s D and d are high
o Most of the debt come from official sources like IMF, so r is
low and BT is positive
•
In this stage accumulation of debt will not pose any serious
threat as there is positive capital flow which can be used for
productive development project earning rate of return higher
that interest rate (r)
•
In the later stage
o D is too large, d slowly falls
o Most debt comes from commercial banks and
private sector lenders, r is high and BT is negative
Six Factors
In the later stage, d is low and r is high for the following
reasons
1. Very large D, d declines as amortization rises
2. Switch from official to private sector lenders, resulting in
high r
3. Adverse terms of trade and balance of payment deficits
4. Global recession, oil-shock
5. Loss of confidence in currency of LDC’s
6. Capital flight
Thus, debt crisis becomes self-reinforcing