Latin America Economic History Notes
Autor: Maryam • March 5, 2018 • 4,080 Words (17 Pages) • 601 Views
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Week 3: Lesson 5
Reading Dooley: A retrospective on the debt crisis nber
Learning goals: To understand the internal and external factors to built up debt in LA in the 70’s (Girardo, Manni 1989)
Recall : Current account deficit = More external debt
To balance it must Increase K *(Rise in foreign capital flows) or Reduce international Reserve (Assets, Held by Central bank denominated in foreign currencies(but usually denominated in USA) )
Increase in K* means increase in country’s debts
Rule : Should hold at least 3 months of imports of reserve
GDP Growth
Inflation
1970s-79
1981-89
1970s-79
1981-89
Argentina
1.6
-0.8
130.8
340.1
1973 : they had a military coup and civil uprising
Brazil
7.6
2.6
40.5
254.2
After the second world war, Brazil grew quite fast
Chile
2.8
2.1
42.7
19.7
Asia
Average =8-9.0%
4-7%
Phillip’s Curve
[pic 2]
- When inflation increase, unemployment will increase.
- When GDP stagnated, inflation increase
Reasons: It’s because when GDP is declining , country needs to print more money to finance the country.
Related to Fiscal and Monetary policy, try to print money to increase public debt to stimulate the economy, therefore causing more inflation.
Pattern of debit accumulation in Latin America
Why build up external debt?
- International liquidity
- US Banks
- Floating Rates contracts
- LIBOR and commodities Prices
- Growth in Advanced economies
Consequences
Rise interest > Rise of cost of debt > Public debt increase > Result of country needs to print more money > inflation increase > unemployment should decrease
External Factors
Capital flow to Latin America
International Liquidity
+ Current Account (oil) > 0 -> Euro money market -> US Bank -> Argentina and Chile-> Private Sector (Real Estate / DG)
+ Current Account (oil) > 0 -> Euro money market -> US Bank -> Brazil and Mexico-> Public Sector and investments
US Banks: Confident that if something went wrong in LA COUNTRIES, the US Treasury will bail them out
US Treasury: Thinks otherwise; not going to bail them out. BUT IMF will finance/bail Latin America
US bank : financial position
- = 120%[pic 3]
This means that if LA declares bankrupt , all the bank capital will not even be enough to bail the them out. All American’s bank will have to go bankrupt too.
- Implicit approval and encouragement of US Government
- Liberal approach. Market forces will lead to the most efficient allocation of financial resource across countries
- By Milton Friedman , marget torcher, Ronald Regan
Floating Rate Contracts
How do we protect creditors from instability of inflation?
- Creation of floating rate contract to lend to Latin America
- Semiannual libor + Risk = Twice yearly
- Example : Jan 75 - loaned $100 to general @ libor(0.5%), july 75 – pay $100 + Libor(1.5%) + risk
When libor rate is 16% at 1980s it created a problem for Latin America. Which triggered the debt crisis.
Exports Price index LA
+ [pic 4][pic 5]
Growth in Advanced Economies
When US was doing well, export was doing good for Latin America
When US had a crisis exports to US decreased and caused crisis in LA
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Week 3: Lesson 6
Know current account deficit for test
Patterns of debt accumulation
External Factors
Internal Factors
- Argentina Political agenda
- liberalization
- Open Capital flow
- Open Foreign trade
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