Economics%20of%20Latin%20America%20

1
Economics of Latin America the Caribbean
2
LISTING OF LATIN AMERICAN COUNTRIES Argentina
Belize Bolivia Brazil Chile Colombia
Costa Rica Cuba Dominican Republic Ecuador
El Salvador Guatemala Honduras
Mexico Nicaragua Panama Paraguay
Peru Suriname Uruguay Venezuela (other)
French Guiana a colony LISTING OF CARIBBEAN
ISLAND NATIONS Anguilla - Antigua and Barbuda -
Aruba - Bahamas - Barbados - Bermuda - Cayman
Islands - Cuba - Dominica - Dominican Republic -
Grenada - Guadeloupe (French) - Guyana - Haiti -
Jamaica - Martinique (French) - Montserrat -
Netherlands Antilles - Puerto Rico - Saint Kitts
Nevis - Saint Lucia - Saint Vincent
Grenadines - Trinidad and Tobago - Turks and
Caicos Islands - Virgin Islands
3
  GDP valuation GDP per Income Poverty Human Environment Quality Annual
  based on PPP capita equality Index Development Performance of life economic
Country 2008 Current (PPP) (2001-06) 2005 2008 2008 2005 growth ()
  Billions USD   2008 USD Gini index   HPI-1    HDI EPI index 2007
                 
 Argentina 570.53 14,354.00 51.3 4.1 0.860 (H) 81.8 6.469 8.7
 Bolivia 43.45 4,332.00 60.1 13.6 0.723 (M) 64.7 5.492 4.6
 Brazil 1,975.90 10,298.00 57 9.7 0.807 (H) 82.7 6.47 5.4
 Chile 246.48 14,688.00 54.9 3.7 0.874 (H) 83.4 6.789 5.1
 Colombia 402.46 8,336.00 58.6 7.9 0.787 (M) 88.3 6.176 7.7
 Costa Rica 48.92 10,832.00 49.8 4.4 0.847 (H) 90.5 6.624 7.3
 Cuba N/A N/A N/A 4.7 0.855 (H) 80.7 N/A N/A
Dominican Republic 76.19 8,558.00 51.6 10.5 0.768 (M) 83 5.63 8.5
 Ecuador 104.67 7,518.00 53.6 8.7 0.807 (H) 84.4 6.272 2.5
 El Salvador 43.89 6,052.00 52.4 15.1 0.747 (M) 77.2 6.164 4.7
 Guatemala 66.84 4,899.00 55.1 22.5 0.696 (M) 76.7 5.321 5.7
 Haiti 11.68 1,292.00 59.2 59.2 0.521 (M) 60.7 4.09 3.2
 Honduras 32.67 4,085.00 53.8 16.5 0.714 (M) 75.4 5.25 6.3
 Mexico 1,550.26 14,581.00 46.1 6.8 0.842 (H) 79.8 6.766 3.2
 Nicaragua 16.75 2,704.00 43.1 17.9 0.710 (M) 73.4 5.663 3.8
 Panama 38.31 11,255.00 56.1 8 0.832 (H) 83.1 6.361 11.5
 Paraguay 29.34 4,767.00 58.4 8.8 0.752 (M) 77.7 5.756 6.8
 Peru 244.69 8,584.00 52 11.6 0.788 (M) 78.1 6.216 8.9
 Uruguay 40.66 12,707.00 44.9 3.5 0.859 (H) 82.3 6.368 7.4
 Venezuela 362.77 12,933.00 48.2 8.8 0.826 (H) 80 6.089 8.4
Notes (H) High human development (M) Medium human development Notes (H) High human development (M) Medium human development Notes (H) High human development (M) Medium human development Notes (H) High human development (M) Medium human development
4

• Latin America Update (2010)
• In the five years between 2004-2008 Latin
  Americas economies grew at an annual average
  rate of over 5.
• Inflation remained generally low.
• Credit expanded and exports boomed.
• Proportion of people living in poverty fell from
  44 in 2002 to 33 in 2008.

• Until the fall of 2008 Latin Americans could
  still hope that they would escape the worst of
  the downturn.
• But in the last three months of 08, Latin
  America saw its stock markets crash, currencies
  wobble and credit start to dry up. That came on
  top of falling exports and the plunge in the
  prices of the commodities it sells to the world.
• Estimate regional GDP declined 3.6 in 2009.

5

• Remittances (money being sent home by Latin
  Americans working abroad) has fallen sharply.
• Still, the region withstood the global economic
  decline better than had been anticipated in 2009,
  and is rebounding quickly.
• The regional economic powerhouse, Brazil,
  continued to see strong inflows of foreign direct
  investment even while its economic output
  contracted 1.2.
• The increase in commodity prices after March of
  2009 helped most Latin American countries.
• As a whole, the OECD expects Latin American and
  the Caribbean to recover modestly in 2010 and
  2011, with growth of 2.2 and 3.2 respectively.
• Growth in the English speaking Caribbean will be
  very weak to begin with, with growth returning to
  most of these economies only late 2010/early 2011
  (tourism).
• Much will depend on what happens with the Global
  Economy in general and the US in particular, in
  the second half of 2010.

.
6
(No Transcript)
7

• Many fear that Latin America will revert to its
  dictatorial and populist past that was often
  characterized by the seizing of foreign assets
  along with fiscal and monetary irresponsibility.
• This may be a concern for Venezuela, Bolivia and
  Ecuador, but throughout the region democracy has
  quickly formed deep roots.

• Results from a October 2009 Latinobarómetro poll
  (left) indicates that the countries of Latin
  America may not only be diverging economically in
  the coming years, but we may witness political
  divergence as well.
• Most Latin Americans see themselves as
  politically moderate, but they retain a yearning
  for strong leaders and expect the state to solve
  their problems.

8

• Latin Americans generally support democracy and
  its institutions, although many remain frustrated
  by the way their political systems work in
  practice (weak rule of law, widespread corruption
  and cronyism).
• General risks
• Biggest risk in the region is of abandoning the
  recent commitment to fiscal and monetary
  prudence.
• While most of the poorest are nowadays covered
  by government cash-transfer programs, those in
  the third to the fifth deciles of income
  distribution are now at risk of falling back
  into, or going deeper into, poverty.
• Corruption is still a major obstacleand may
  worsen in the short run.
• Update on the Caribbean
• On October 15th, 2008 in Barbados, 13 Caribbean
  countries approved a new Economic Partnership
  Agreement (EPA) with the European Union.
• The EPA involves only gradual changes to a
  trading relationship which goes back to colonial
  days. It grants almost all Caribbean exports
  duty-free and quota-free access to Europe. In
  return, the Caribbean will phase out duties on
  87 of European imports by 2033.

9
Trade between US and Caribbean Countries Trade between US and Caribbean Countries Trade between US and Caribbean Countries
Millions of US (2007) US Exports Nations Imports
Antigua and Barbuda 240 9
Bahamas 2,473 523
Barbados 457 40
Belize 234 113
Dominica 84 2
Grenada 83 9
Guyana 188 147
Jamaica 2,318 789
St. Kitts and Nevis 203 61
St. Lucia 166 36
St. Vincent and Grenadines 69 1
Suriname 306 136
Trinidad and Tobago 1,779 9,342
Dominican Republic 6,091 4,328
Haiti 711 500
Cuba 447 0
Aruba 529 3,070
Bermuda 660 24
Netherlands Antilles 2,082 810

• Until late 2008 these countries have had
  one-way access to European market (since 1975
  under the Lomé Convention, and its successor, the
  Cotonou agreement)
• Pattern of trade relations between Europe and
  the Caribbean was no longer in synch with the
  rules of the WTO.
• The agreement will help the Caribbean to develop
  new exports, and to rely less on old staples like
  bananas and sugar.
• US is still the largest trading partner with,
  and investor in, the region.
• Still, the most dynamic business opportunities
  in the coming decade will be between countries in
  the region and the EU.
• The big story for 2010 may be Cuba.

10
CORRUPTION PERCEPTIONS INDEX 2008 CORRUPTION PERCEPTIONS INDEX 2008 CORRUPTION PERCEPTIONS INDEX 2008
country country 2008 CPI
rank country score
109  Argentina 2.9
102  Bolivia 3
80  Brazil 3.5
23  Chile 6.9
70  Colombia 3.8
47  Costa Rica 5.1
65  Cuba 4.3
102  Dominican Republic 3
151  Ecuador 2
67  El Salvador 3.9
96  Guatemala 3.1
177  Haiti 1.4
126  Honduras 2.6
72  Mexico 3.6
134  Nicaragua 2.5
85  Panama 3.4
138  Paraguay 2.4
72  Peru 3.6
23  Uruguay 6.9
158  Venezuela 1.9
Each year, Transparency International draws on
surveys of businessmen and country experts to
gauge perceptions of corruption in 180 countries
around the world. It defines corruption as the
abuse of public office for private gain. This
year, Chad shared the bottom slot with
Bangladesh. Corruption has declined significantly
over the past year in a number of countries,
including France, Hong Kong, Taiwan and
Nigeria. Transparency International
11
(No Transcript)
12

• The Puzzle of Latin America Economic Development
  Diversity, Trends and Conflict
• The nations of Latin American and the Caribbean
  are engaged in programs of political and economic
  liberalization that may prove as historic as
  their struggles for independence from Spain and
  Portugal.
• After decades of political instability,
  corruption, and military dictatorship, many
  countries in the region seem to be developing
  stable democracies.
• Markets long protected from competition are
  opening to foreign trade, foreign investment, and
  regional cooperation.
• Issue 1 The Economic Landscape
• Diversity The nations of Latin America are
  different from each other in many ways. Many of
  them also have a large amount of diversity within
  themselves.
• Regional trends Changing from a rural to an
  urban society, an increase in population, and new
  found deposits of natural resources. The
  countries have instituted different types of
  political structures and domestic policies.

13

• The five major issues that confront Latin
  American countries today
• External Balance
• Credibility
• Distribution
• Sustainability
• Role of the State
• The net effect of the reforms initiated in the
  1980s and 1990s may very well result in a
  divergence among the nations of Latin America
  over the next 25 years.
• Those that successfully address these five issues
  will see their peoples fortunes rise, while
  those that fail will experience sub-par economic
  growth and political instability.
• The importance of running a consistent balance of
  payments surplus gt boost reserve of domestic
  financial capital. Role of national savings rate.

14

• What is the difference between economic growth
  and development?
• Authors definition of development a process
  of meeting the basic human needs of the
  population and enhancing options for the
  allocation of economic resources both today and
  in the future to increase the choices citizens
  have in their daily lives.
• UN Millennium Development Goalspgs. 14-15
• Role of technological change the world
  technology frontier.
• Human Development Index
• Dualism gt the rich become richer and the poor
  more destitute in the process of change (without
  access to resources, the poor often become
  poorer)
• the simultaneous existence of modern and
  traditional economics.
• complicates the policymakers task (must
  address the social deficit).
• Todaro growth must be accompanied by a
  change in the economic and social rules of the
  game.
• Therefore, economic growth is a necessary, yet
  not sufficient, condition for economic
  development.

15
The Human Development Index (HDI) is an index
combining normalized measures of life expectancy,
literacy, educational attainment, and GDP per
capita for countries worldwide (ranges from 0 to
1 with green being greater than .85, yellow
between .85 and .5 and red below .5)
16

• Growth of output must outstrip population growth
  to improve the resources available to people.
• Tasks of policymakers in designing development
  policy
• They must establish a delicate balance between
  the external sectors and domestic macro policy.
• They must be attentive to the changing nature of
  the global economic environment as well as
  preserve confidence and stability within their
  own economies.
• To attain equitable growth, they must fashion
  policies to target different economic, ethnic,
  and gender groups.
• Their policies must balance the allocation of
  resources between meeting the needs of the
  present as well as future generations (i.e.
  sustainable development).
• Must face the challenge of deciding the extent to
  which each state should supplement the activities
  of its own markets to facilitate equitable,
  sustainable development.

17

• Three basic schools of thought Development
  Theory
• Planning Model
• a. Dependency theory Center vs. Periphery
• 2. Institutionalist Model
• a. Structuralistsasymmetric development
  (bottlenecks)an economy also shaped by power and
  politics.
• b. Heterodox theorya flexible approach
• 3. Orthodox Model
• a. Chicago Schoolgrounded neoclassical
  economics
• b. Washington Consensus
• c. IMF

18

• Issue 2 Historical LegaciesPatterns of Unequal
  
• Unsustainable Growth 
• What were the Spaniards main goal in coming to
  the New World?
• What kind of social and political system did
  they set up?
• Difference between peninsulares and creoles?
• Imperial trade restrictions.
• What is the meaning of the terms mercantilism,
  monoculture and Dutch Disease?
• Agricultural development workers labored on a
  debt peonage structure gt the latifundios
  (production for the world market the best land
  the encomieda system ltrepartida quintogt) and
  minifundios (subsistence farming marginal
  land). Model of self-sufficiency (feudal concept
  of manor).
• Why was Brazil overlooked by the Spanish?
• Independence and entry into the world economy
  Most nations gained independence in the early
  1800s. Followed by a period of turmoil
  territorial disputes. In the 1840s, Latin America
  began to enter the world trade market, especially
  with Great Britain.

19

• What was The Golden Age (1870-1914)?
• The Golden Age occurred in Latin America between
  1870-1914 and was so called because of the
  increased demand for exports, the tremendous
  growth in population and new transportation
  technology.
• Stalled Progress (1914-1930) During this
  period, the U.S. replaced Great Britain as the
  primary trading partner and investor of Latin
  America. Export led growth slowed during this
  period because of falling prices and because of
  World War I scissors effect Engles Law.
• The 1930s (the Great Depression) The main
  causes of problems in Latin America were capital
  flight, contracting income because of declining
  export prices, insular multinationals, lack of
  forward and backward linkages from prior
  development.
• The 1930s was a political watershed period in
  Latin America with its "increased social
  pressure, numerous strikes, the emergence of
  radical parties, and nationalist rhetoric." A new
  development model emerges.
• Issue 3 Theories, Ideas, and Opinions
• Divergent Opinions The major economic problems
  plaguing Latin America are low incomes, unequal
  income distribution, periods of hyperinflation,
  negative balance of payments and periodic debt
  crises.

20

• Many of the proposed policies are radical because
  the problems are so extreme that it appears minor
  changes in policy will not work.
• Why is Latin America underdeveloped?
• Dependency theory periphery? center?
• Harsh critics of foreign direct investment and
  MNCs .
• 2. Mainstream interpretations
• Resource endowmentglobal geography.
• The conventional, mainstream economists say that
  underdevelopment is caused by small market size,
  slow capital accumulation (low domestic savings),
  shortages of foreign exchange, unskilled labor,
  and poor political organization (inefficient
  public institutions).
• Late out of the gate no agricultural revolution,
  lack of an investment climate, needed
  transportation revolution, imperial opposition,
  opposition from within difficult to catch up
  from behind.
• Three positive effects from foreign direct
  investments and MNCs?
• Foreign firms bring superior technology.
• Increases competition in the host economy.
• Foreign market access.

21

• Concepts to Define Understand at the Beginning
• 1. Comparative advantage - def A nation has a
  comparative advantage over a trading partner in
  the production of an item if it can produce that
  item at a lower unit cost than its partner.
• Implications...
• a. Any country can increase its income by
  trading, because the world market provides an
  opportunity to buy some goods at relative prices
  that are lower than those which would prevail at
  home in the absence of trade.
• b. The smaller the country the greater this
  potential gain from trade, but all countries
  benefit to some extent.
• A country will gain most by exporting commodities
  that it produces using its abundant factors of
  production most intensively, while importing
  those goods whose production would require more
  of the scarcer factors of production.
• 2. Balance of Payments - Exports (X) Imports
  (M)
• B of P PxX PmM
• Px vector of prices of exports
• Pm vector of prices of imports

22

• Surplus excess of exports over imports
• Deficit excess of imports over exports
• Merchandise trade account, capital account,
  reserve account
• Engles Law again gt deteriorating terms of
  trade over time.
• 3. Exchange rates - def The price of one
  nation's monetary unit in terms of the monetary
  unit of another country.
• - Foreign exchange market A market in which
  buyers and sellers of bank deposits denominated
  in the monetary unit of many nations exchange
  their funds.
• - Exchange rates can be allowed to fluctuate
  freely, can be "managed" or can be pegged to the
  currency of a major trading partner.
• gt Graph (500p1 or 1p.002)
• Demand side - People who want to import Chilean
  goods, or travel in Chile, or others who just
  want to hold pesos.
• When North Americans demand more Chilean
  vegetables, copper, wine, or whatever, (D curve
  shifts right) the price of the peso will rise in
  terms of dollars.

23
Supply side - those who want to import goods into
Chile from the United States or hold . (1) When
Chileans demand more US cars or computers (S
curve shifts right) the price (in ) of the
Chilean peso will tend to decline (S of peso
shifts r). Appreciation and depreciation of a
currency When country A's currency becomes more
valuable relative to country B's, country A's
currency is said to appreciate relative to that
of country B and country B's currency is said
to depreciate relative to that of country
A. Determinants of Exchange Rates 1. What
determines the relative positions of SD curves
for currency? (a) Relative price levels -
constantly changing (inflation) (b) Relative
rates of growth (c) Relative interest - rate
levels (d) Expectations/Speculation Example of
Argentina
24

• (e) Random daily trade and financial flowsnoise
  (3.8 trillion per day)
• Note Market exchange rates vs. PPP rates
  (purchasing power parity).
• 4. Domestic Absorption (A) The national
  expenditures on both home-produced goods and
  imports.
• - Not equal to B of P...
• If AgtGDP gt trade deficit
• If AltGDP gt trade surplus
• How does a nation pay for domestic consumption
  (absorption) above and beyond GDP? gt Draw down
  domestic savings, sell domestic assets and/or
  borrow from abroad (increase external debt).
• 5. Import Substitution Industrialization
  development strategy - The substitution of
  domestic production for imports of foreign
  manufactures.
• Was first explored by Latin American countries
  when their primary exports markets were severely
  disrupted, first by the Great Depression of the
  1930s and subsequently by the breakdown of
  commercial shipping during World War II.
• What are forward and backward linkages?

25
The Big Mac Index (7/2009) The Big Mac index is
based on the theory of purchasing-power parity.
Under PPP, exchange rates should adjust to
equalize the price of a common basket of goods
and services across countries. Our basket is the
Big Mac. Video Clip
26

• - Emerging from the war with fledgling
  industries, countries like Argentina, Brazil,
  Columbia, and Mexico began systematically to
  sustain these manufactures by erecting tariffs
  and other barriers to trade-competing imports
  from the US.
• Latin America developed import substitution
  regimes with a multitude of protective techniques
  that were later emulated by other developing
  countries.
• Conditions for success
• (1) Identify large domestic markets, as indicated
  by substantial imports over the years.
• (2) Ensure that the technologies of production
  can be mastered by local manufacturers or that
  foreign investors are willing to supply
  technology, management, and capital (joint
  ventures).
• (3) Erect protective barriers - Either tariffs or
  quotas on imports, to overcome the probably high
  initial cost of local production and make it
  profitable for potential investors in the target
  industries (infant industry argument).
• First targets gt Consumer goods industries
  (processed foods, beverages, textiles, clothing,
  and footwear) have technologies easily obtained
  and mastered by domestic producers.

27

• (4) Keep an overvalued exchange rate gt Imports
  are cheap (intermediate inputs are cheap) and
  exports are expensive to foreigners (reduced
  dependence of foreign markets for economic
  well-being Foreigners just won't buy your
  products).
• (5) SOEs and why? Key industries vs. natural
  resources (p. 62).
• (6) Role of MNCs? Subject to restrictions (p.
  67).
• Marked change in national economic policy began
  in the 1950s
• Following the end of the WWII, most Latin
  American governments formulated clear policies to
  foster "import-substituting industrialization".
• - Governments improved the region's transport
  system and expanded the infrastructure for
  electricity and water.
• - Governments helped finance local industry and
  welcomed foreign corporations willing to
  establish factories in certain industries.

28
- Still the strategy failed to resolve the Latin
American tendency to import more than it could
export. - In fact the import strategy
contributed to the problem because the new
factories were dependent on foreign suppliers for
machines, spare parts and intermediate
products. - As the policy ran its course,
domestic markets became exhausted... if economic
growth was to be sustained at home, then foreign
debts had to be incurred (keep political
promises). (4) Eventually, many developing
nations faced a breakdown (run out of loans and
must reduce exchange rates). - When this
occurred the wealthy and powerful were the first
to know domestic currency will exchange into a
larger number of foreign currency per unit.
Economic reality gt the national currency must
depreciate gt Capital flight Causes the domestic
currency to depreciate rapidly. In other words
this strategy ended with a crisis. - Devaluation
typically reduces imports and increases exports
but in the import trade strategy environment, the
dependency on imported goods made the demand for
foreign goods inelastic gt imports did not fall
yet became more expensive to obtain. - Also,
reducing imports would mean reduced employment
(populist politicians would not accept) gt net
result worsening of the balance of
payments/foreign exchange problems.
29

• a Government felt compelled to borrow as much
  as possible from external sources (plus to print
  money to pay their domestic bills).
• (5) In addition, levels of efficiency in the new
  industrial plants were sometimes rather low due
  to limited size of the home market.
• Many producers used technology designed to
  produce high volumes of output (higher than Latin
  American countries could support)
• Many firms operated at capacity levels below
  50!
• (6) Under the ISI regimes governments introduced
  productive tariffs and quotas (or total ban on
  certain imports) to protect domestic producers
  and in some instances domestic producers had
  monopoly status gt little incentive to improve
  management or labor practices so the prices of
  local manufactures rose well above international
  prices.
• a Also, very powerful domestic interests
  resisted dismantling tariffs and quotas that
  protected their favored status.

30
(7) Next, the rate of job creation was much lower
than had been hoped for - largely because of
the rapid growth of the labor force (from both
urban migration and high rates of population
increase). - Also, the problem was made worse
because the technology incorporated in domestic
industry was often capital-intensive even though
more labor-intensive techniques were
available. (8) Finally, the import-substitution
strategy and associated domestic growth was
bound to slow down eventually because of small
markets without hope of exports (due to
overvalued exchange rate). but it worked for a
while (5.5 growth 1950 1980) 6. Export
oriented trade policy development strategy
(outward looking trade strategy or the
neoliberal agenda) - Allows a nation to
realize, as fully as possible, the inherent gains
from their comparative advantage through free
markets. - Often means primary-export-led
growth (drawbacks volatile price swingsand
limited revenue upside due to Engels Law). -
Starting in the 1960s there were the beginnings
of an intellectual return to free trade thinking
and attempts were made to encourage Latin
American countries to export more to the
developed countries.
31
- Stimulus here was the budding success of the
Asian Tigers or NICs (Newly Industrialized
Countries Hong Kong, Korea, Singapore and
Taiwan) who were successfully penetrating MDNs
(More Developed Nations) markets. - Encouraged
by the advice of the World Bank, several
governments including those of Brazil and
Colombia began to reduce levels of domestic
protection and to give incentives to export
producers. a By 1970 this had become an
accepted way of sustaining industrial
expansion. Conditions for Success (1) Maintain
an exchange rate that helps make it profitable
for domestic producers to sell their crops,
manufactures, and services on world markets. The
lower the exchange rates, the more desirable the
nations products will be to foreigners. As
exchange rate decreases gt exports rise while
imports fall gt goal to get nation to run a
balance of payments surplus gt give them foreign
currency to service and reduce external
debt. (2) It may be necessary to subsidize some
exports to induce manufacturers and farmers to
invest in capacity for the export market (infant
industry argument again).
32

• (3) If governments want producers to turn towards
  world markets, they must reduce the relative
  attractiveness of production for the domestic
  markets gt reduce high protective tariffs for
  favored industries, eliminate quotas on imports
  and reduce regulations.
• Hyperinflation - Inflation (absolute increase in
  price level) at very high rates of usually 200
  percent or more prevailing for at least one year
  (table on page 108).
• Caused by one factorgovernment printing too
  much money to pay its bills (Seniorageor,
  quantitative easing).
• Why is it bad?
• A. Uncertainty and therefore higher risk gt less
  investment (both from domestic and international
  sources). Induces the outflow of financial
  capital and reduces FDI. The poor flee to
  dollars.
• B. Functions of money destroyed... store of
  value, unit of accounting, unit of exchange.
• No lubricant to machinery of economy gt
  frictiongt slows down (people revert to barter).
• C. Encourages speculation... Diverts effort away
  from production.

33
D. But why do it? Effectively a tax without
increasing official tax rates government uses
money right after it is printed thereby using it
when it has the greatest purchasing power...
those who receive it later have reduced
purchasing power therefore have transferred,
unknowingly, some of the purchasing power which
would have been theirs to the government
(inflation tax). especially impacts the
poor. it is not understood, so most citizens
dont blame government. E. Solution... New
currency or abandon currency (...El Salvador and
Ecuador have done plus the US accepted almost
everywhere). 8. The International Monetary Fund
(IMF) What is it? - International role of IMF is
to extend emergency credit (Short Term!) to
member nations who get in trouble. - Criticsgt
IMF tool of MDNs lying in wait to get control of
the nation's economic policies and reshape them
in a monetarist, market oriented, conservative
model. - Problem Has had a standard package
that includes 1 Monetary Fiscal restraint.
34
Monetary restraint reduces domestic demand and
reins in inflation (also ties politicians hands
so they cant use seniorage). Government
spending reduced (reduce size and involvement of
government). Create fiscal prudence by bringing
the federal budget in balance. 2 Currency
Devaluation Goal Reduce excess demand and to
reorient the structure of national production
away from imports and toward exports (with low
import content a comparative advantage often
focused on labor intensive manufactured goods and
primary products). also reduces appeal of
capital flight. 3 Cut subsidies and other
trade impediments (tariffs, quotas, rules
regulations) gt open up economy to global market
forces. 4 Limit on wage rate increases in
countries with high inflation there are also
price controls to help break inflation psychology
structural inflation Argentina, Brazil and
Peru. 5 Overhaul tax structure to reduce
loopholes for wealthy and to make more efficient.
Note Theres been little progress on this one.
35

• - All subject to periodic review If they
  haven't followed guidelines they lose additional
  funding or must accept and even more stringent
  set of guidelines.
• gt funding is received in installments over
  period of the loan.
• Capital flight A rapid and massive conversion of
  domestic currency for that of a major
  international reserve currency and movement of
  that reserve currency out of the country to an
  off-shore financial haven.
• - When devaluation is about to occur, the
  wealthy and powerful are the first to know.
• - The overvalued exchange rate means that just
  before crisis point the domestic currency will
  exchange into a larger number of foreign currency
  per unit.
• - Economic reality gt the national currency must
  depreciate gt capital flight helps to depreciate
  the domestic currency rapidly in a short period
  of time (depletion of reserve account).
• - This often creates volatile financial markets,
  increases risk, increases interest rates, social
  unrest and reduces economic growth.
• - It is also followed by a period of inflation
  ( actually stagflation).
• - Psychology imbedded in wealthy Latin culture
  to have one financial foot in and one financial
  foot out of home country (keep a house and bank
  account in Miami).

36

• Evaluating and Comparing Economies
• Need some definitions before we go on...
• Institution Institutions are rules of the
  society that structure the interaction among
  people.
• - Are made up of formal rules and regulations.
• - And informal rules as well at times (important
  in LA!).
• - They are the informed ways by which people deal
  with each other every day ? norms of behavior.
• - Institutions, collectively, are the framework
  within which all of human interaction...
  political, social and economic... takes place.
• Economy The economy of a society is comprised of
  institutions that perform economic functions.
  These institutions are structured and behave
  according to established working rules.
• Philosophical Basis for an Economy A viewpoint
  which specifies the place of an individual within
  society an ideal state of political, social and
  economic reality to serve as a set of ultimate
  goals for society and a general program
  suggesting broad policy measures that will guide
  society from its actual conditions toward the
  ideal reality. This economic philosophy will be
  multidimensional in the sense that social,
  political, and cultural, as well as economic
  elements are contained therein.

37
1. Capitalism ? Adam Smith - dominance of "the
invisible hand" in guiding economic activity.
Limited role of government (provide public goods
and define the rules of the game). A process
ideology. B. Institutional Economics 1. While
there is no hierarchy of importance in the tenets
of institutional economics, one of the most
important for our purposes is that... a
Economies are fluid rather than static. b The
second tenet is that one can understand an
economy only within its historical context. -
The constellation of factors shaping an economy
is unique. - A corollary to this tenet is that
what might work for one nation might not work
for some other due to historical
inconsistencies. c Third, the values of a
nation's people can be understood best by
studying the philosophical/religious
underpinnings of its culture. - Old and new
philosophies alter attitudes that may
subsequently lead to a change in work rules and
therefore institutions.
38
d A fourth general tenet is that the values,
institutions and work rules which operate in one
nation will not necessarily function in another
nation. - A corollary tenet is that values,
institutions and work rules which functioned in
the past may not function in the future. G. C.
Allen "One of the most common fallacies in the
minds of academics, or the citizenry of a nation,
is that once a trend is established it will
persist indefinitely." e Finally, the basic
structure and performance of an economy are
influenced by the dynamics of the society's
social and political structure. 4. This broad
theory is based upon the interrelationship
between a society's beliefs, power structures,
and working rules of institutions. a The
theory can be used to explain the nature and
evolution of economic systems. b Changes in
working rules can modify institutions or create
new ones, with the economy evolving in the
process. c The philosophical basis accepted by
authorities and the economy's performance
determines whether the working rules are
retained, modified, or replaced.

39

• 5. Working rules...
• - Establish the boundaries of economic activity
  between institutions.
• 6. Principal institutions...
• - Socially determined not inherent.
• a Instrumental in establishing and coordinating
  most production and distribution patterns of
  behavior, and giving meaning and durability to
  routine activities.
• b Significant features Origin, the activities
  participants perform, working rules governing
  them, their impact on the economy, and the
  philosophical basis for these activities and
  rules.
• 7. Behavior of the economy...
• - Three components How it is organized to
  resolve the economic problem(s) (what, when, how,
  for whom), institutional change, and performance.
• In describing how each society is organized to
  resolve its economic problem, three questions
  need to be addressed

40
1. How is the resource allocation decision
organized... a Centralized (state control) or
decentralized (markets) or some combination.
Decision making rules and institutions. 2. What
are the rules regarding ownership and control
over productive resources? - In each economy the
rules differ...even where similar, differing
restrictions exist. 3. What type of social
process has been adopted for coordinating
information and for making production and
distribution decisions? - Including markets,
traditional mechanism, or some form of economic
planning. II. Evaluating and Comparing
Economies - The performance of an economy is
influenced by goals and priorities established by
authorities and by environmental factors such as
technology, natural resource endowment, and
international economic and political factors...
all interrelate.
41
- How the economy performs, relative to stated
goals and priorities (prevailing norm), determine
which other economic, social or political
policies are necessary. - Evaluating and
comparing economies cannot be purely
objective. Conclusions influenced by the
analysts point of view... the comparors
norm. A. Evaluating the performance of an
economy... 1. An economy's performance can be
defined in many ways, depending upon the
performance criteria, methods of measurement and
weights attached to each criterion when overall
performance is calculated (the performance
index). - The choice of criteria is up to the
analyst (you!). 2. Four steps to follow a. The
analysts definition of performance. b. The
identification of performance criteria. c. The
choice of performance indicators for each
criterion.
42

• d. The compilation of a performance index for
  cross-comparisons.
• Includes weighting - must be made explicit
  (you will not be expected to do this)
• e. Need for a benchmark country.
• 3. Criterion examples
• Economic growth (change in GDP or GDP per
  capita)
• Economic stability (low inflation, stable
  exchange rate, low unemployment, lack of
  deficits, etc.)
• International balance of trade, external debt,
  and currency values
• Income distribution... Lorenz Curve (Gini
  Coefficient)
• World Atlas of Income Inequality
• Quality of life e.g. Human Development Index
  (United Nations)
• other indices Corruption, Competitiveness,
  Economic Freedom

43
Approach in writing a course paper on a country
(ideal) Mexico 1. Introduction. Start with
overview of country/issue plus some current
statistics.
44

• Population 108.7  m (2007)
• Population growth 1.2 (average, 2003-2007)
• Land area 1.9m sq km (about three times the
  size of Texas)
• Currency Mexican peso (Ps) 12.95 pesos to the
  dollar (Feb. 2010)
• GDP US bn market exchange rate
  893.4 US bn purchasing power parity 
   1,345.8
• GDP growth 3.3 (average, 2003-2007)
• GDP per head GDP per head (US market
  exchange rate)   8,219
• GDP per head (US purchasing power parity) 
   12,381
• Inflation  4.2 (average, 2003-2007)

45

• BackgroundMexico was ruled by the Partido
  Revolucionario Institucional (PRI) and its
  predecessor, the Partido Revolucionario Nacional
  (PRN), between 1929 and 2000. Once strongly
  nationalist and interventionist, the leaders of
  PRI governments in the 1990s embraced free-market
  policies and economic liberalization. Following
  the victory in July 2000 of Vicente Fox Quesada,
  the presidential candidate of the centre-right
  party, the Partido Acción Nacional (PAN), changes
  to the political system are slowly taking place.
  The PRI remained the largest party in Congress
  during the Fox years, but it became less
  enthusiastic about free-market policies. Current
  president Felipe Calderon (PAN).
• Political structureThe political system is
  presidential, bicameral (Senate and Chamber of
  Deputies) and federal (32 states). The president
  is elected every six years Mr. Calderon took
  office in December 2006. The 500 members of the
  Chamber of Deputies are elected every three
  years, 300 from single-member districts and 200
  by proportional representation. Three-quarters of
  Senate members are elected directly for a
  six-year term with the remaining one-quarter
  elected by proportional representation.

46
Key indicators Forecasts 2007 2008 2009 2010 2011 2012
Real GDP growth () 3.3 2.3 1.6 3.4 3.8 3.6
Consumer price inflation () 4 5.2 5.2 3.6 3.4 3.3
Commercial banks' prime rate (av ) 7.6 8.3 8.5 7.1 7.4 7.4
Current-account balance ( of GDP) -0.6 -1.1 -1.2 -1.5 -1.6 -1.4
Major exports 2007    of total   Major imports 2007    of total 
Manufactures   80.7   Intermediate goods   72.9 
Maquiladora   44.7   Maquiladora   34.2 
Oil   15.8   Consumer goods   14.8 
Agricultural products   2.8   Capital goods   12.3 
Leading markets 2007    of total  Leading suppliers 2007    of total 
 US   82.1   US   49.6 
Canada   2.4   South Korea   10.5 
Spain   1.5   China   5.8 
Germany   1.3   Japan   4.
47

• 2. History be brief.
• - philosophical basis (prevailing norm)
• - identify principal institutions in the social,
  political and economic spheres
• - discuss notable working rules of these
  institutions
• 3. Methodology (more on this below) Explicitly
  state your comparors norm contrast with
  prevailing norm. Define your performance
  criteria, consistent with your comparors norm,
  and provide the data on your chosen country/issue
  and your benchmark country.
• 4. Behavior/Analysis of economy (recent).
• 5. Evaluation from point of view of your
  performance criteriabenchmark country for
  comparison.
• 6. Conclusion
• - what can you now say about this country/issue?
• do some forecasting where are things going
  from here?
• 7. Footnote/Endnotes

48

• I have already chosen Mexico as my primary
  country
• My benchmark country will be Argentina.
• Comparors norm I think the standard of living
  is important and strongly correlated with good
  social indicators (healthy diet, access to health
  care, good sanitation, access to education,
  etc.). Since inflation has been a problem in the
  pastand can devastate purchasing powerthat
  stable, relatively low inflation is a must to
  maintain a productive economic environment.
  Finally, to compete in the global economy I think
  access to technology is crucial for the people.
• Performance criteria The amount of income per
  person in real dollar/peso terms will measure
  standard of living. The change in national prices
  each year will measure inflation. Finally, the
  availability and spread of advance technology
  will lead to the ability to compete in the global
  marketplace.
• Performance indicators
• 1. Inflation, GDP deflator (annual )
• 2. GNI per capita, PPP (current international )
• 3. Fixed line and mobile phone subscribers (per
  1,000 people)

49
       
         
Year Mexico (Inflation GDP deflator) Mexico (Percent change from previous year) Argentina (Inflation GDP deflator) Argentina (Percent change from previous year)
1995 37.87 --- 3.17 ---
1996 30.74 -18.83 -0.05 -101.66
1997 17.69 -42.47 -0.46 784.99
1998 15.39 -13.02 -1.71 267.53
1999 15.09 -1.91 -1.84 7.70
2000 12.10 -19.80 1.04 -156.48
2001 5.88 -51.43 -1.10 -205.64
2002 6.96 18.34 30.56 -2888.45
2003 8.49 21.98 10.50 -65.65
2004 6.10 -28.09 9.19 -12.48
2005 8.80 44.22 5.50 -40.13
2006 13.50 53.41 4.40 -20.00
2007 14.10 4.44 3.20 -27.27
Mexican Inflation in Comparison to Argentina's
Mexican Inflation in Comparison to Argentina's
50
       
  Comparison to Argentina's Comparison to Argentina's Comparison to Argentina's  
Year Mexico (per capita GNI) Mexico (Percent change from previous year) Argentina (per capita GNI) Argentina (Percent change from previous year)
1995 6,690.81 --- 10,178.24 ---
1996 7,058.22 5.49 10,811.49 6.22
1997 7,551.75 6.99 11,742.87 8.61
1998 7,898.89 4.60 12,189.31 3.80
1999 8,208.48 3.92 11,815.08 -3.07
2000 8,815.06 7.39 11,850.38 0.30
2001 8,885.24 0.80 11,482.92 -3.10
2002 8,976.73 1.03 10,299.60 -10.31
2003 9,136.73 1.78 11,306.55 9.78
2004 9,644.73 5.56 12,525.94 10.78
2005 10,420.00 8.04 11,180.00 -10.75
2006 11,670.00 12.00 11,970.00 7.07
2007 12,990.00 11.31 12,580.00 5.10
Mexican Gross National Income per capita (in
current international dollars PPP)
51
 
       
  ...in Comparison to Argentina's ...in Comparison to Argentina's ...in Comparison to Argentina's  
Year Mexico (Fixed line and mobile) Mexico (Percent change from previous year) Argentina (Fixed line and moblile) Argentina (Percent change from previous year)
1995 104 --- 171 ---
1996 106 2.18 193 12.55
1997 117 10.03 236 22.75
1998 139 19.07 273 15.41
1999 193 38.60 323 18.35
2000 270 39.54 390 20.68
2001 358 32.63 399 2.36
2002 406 13.47 379 -4.96
2003 454 11.87 433 14.12
2004 545 19.98 579 33.75
2005 820 50.58 650 12.29
2006 1050 28.05 740 13.85
2007 1260 20.00 840 13.51
Mexican fixed line and mobile phone subscribers
(per 1000 people)
52

• Mexico (United Mexican States)
• Capital Mexico City 8.5 million people.
• Ethnic makeup 60 mestizo, 30 amarindian, 9
  white, 1 others.
• Much of Mexico's territory is vulnerable to
  earthquakes and volcanic activity. In 1943, for
  example, a cornfield in one of Mexico's richest
  agricultural zones sprouted a volcano instead of
  maize. In 1982, a severe volcanic eruption in the
  south took several hundred lives, destroyed
  thousands of head of livestock, and buried crops
  under tons of ash. Thousands of people died when
  a series of earthquakes struck Mexico City in
  1985.
• Mexico is a nation of climatic extremes.
  Much-needed rains often fall so hard that most of
  the water runs off before it can be absorbed by
  the soil. When rains fail to materialize, crops
  die in the fields. The harsh face of the land,
  the unavailability of water, and erosion limit
  the agricultural potential of Mexico. Only 10 to
  15 percent of Mexico's land can be planted with
  crops.

53

• Mexico's central region has the best crop-land.
  It was here that the Aztecs built their capital
  city, the foundations of which lie beneath the
  current Mexican capital, Mexico City.
• For decades, Mexico City has acted as a magnet
  for rural poor who have given up attempts to eke
  out a living from the soil.
• - The size and location of Mexico City have
  spawned awesome problems (the worst smog in the
  Western Hemisphere, traffic congestion is among
  the worst in the world, essential public
  servicesincluding the provision of drinkable
  water, electricity, and sewershave failed to
  keep pace with the city's growth in population).
  
• Mass communication has had an incalculable
  impact on culture. - Television commercials
  primarily use models who are ethnically European
  in appearancepreferably white, blue- eyed, and
  blonde. As if in defiance of the overwhelmingly
  mestizo character of the population (success has
  become associated with light skin).
• - Television, however, has helped to educate the
  illiterate Some Mexican soap operas, for
  instance, incorporate educational materials.

54

• Literacy is portrayed as being essential to one's
  success and well-being.
• Compadrazgo ("co-godparenthood" or
  "sponsorship") is found at all levels of Mexican
  society and in both rural and urban areas.
• - It is a device for building economic and
  social alliances that are more enduring than
  simple friendship. Furthermore, it has a
  religious dimension as well as a secular, or
  everyday, application (informal rules of
  society).
• - The chaos of city life, the hundreds of
  thousands of migrants uprooted from rural
  settings, and the sense of isolation and
  alienation common to city dwellers the world
  over are in part eased by the Hispanic
  institution of compadrazgo.
• - Compadrazgo performs many functions, including
  providing assistance from the more powerful to
  the less powerful and, reciprocally, providing
  homage from the less powerful to the more
  powerful (reaches across class lines and knits
  the various strands of Mexican society
  together).

55

• As Mexico City has sprawled ever wider across
  the landscape, multitudes of new neighborhoods
  have been created. Many are the result of
  well-planned land seizures, orchestrated by
  groups of people attracted by the promise of the
  city.
• - Technically, such land seizures are illegal
  and a primary goal of the colonos (inhabitants
  of these low-income communities) is
  legitimization and consequent community
  participation.
• - Beginning in the 1970s, colonos pursued their
  demands for legitimization through protest
  movements and demonstrations, some of which
  revealed a surprising degree of radicalism.
• - In response, the Mexican government adopted a
  two-track policy It selectively repressed the
  best-organized and most radical groups of
  colonos, and it tried to co-opt the remainder
  through negotiation. In the early 1980s, the
  government created "Citizen Representation"
  bodies, official channels within Mexico City
  through which colonos could participate.

56

• The Border
• Driven by poverty, unemployment and lack of
  opportunity many Mexicans have chosen the United
  States as the place to improve their lives (2009
  estimated at 8.8 million).
• During WWII the presidents of both nations
  agreed to allow Mexican workers, called braceros,
  to enter the US as agricultural workers.
• Regardless, each year hundreds of thousands of
  undocumented Mexicans illegally cross the border
  in search of work (estimated at 4 to 6 million
  at any given time).
• For the Mexican government this is a blessing
  since such mass emigration is a sociopolitical
  safety valve and results in an inflow of dollars
  sent home by workers (remittances).
• Still, the US has attempted to stem the flow by
  negotiating treaties so that US companies and
  Mexican states along the border would profit from
  the creation of assembly plants (maquiladoras).
• Low wages and lax labor and environmental law
  enforcement has resulted in US firms gaining
  profits while the Mexican government reaps the
  benefits of employment and tax dollars.

57

• Mexicos Stability
• Depends on the ability of the ruling elite to
  maintain a state of relative equilibrium among
  the multiplicity of interests and demands within
  the nationand to reign in the drug gangs.
• Process characterized by bargaining among elites
  with various views of politics, social injustice,
  economic policy, and the conduct of foreign
  relations.
• The 1910 Revolution (1910-1917) resulted in the
  Mexican Constitution A remarkable document in
  that it covers not only political rights but
  economic rights as well (e.g. 8-hour work day,
  minimum wage, 6-week paid leave for pregnant
  women, etc.)
• Unfortunately, many of the provisions of the
  1917 Constitution have yet to be achieved.
• Indian problem they have long endured the
  unequal practices of a ruling white and mestizo
  elite.
• Land reform focus of struggle and occasion for
  serious human rights abuses.
• Drug gangsorganized, wealthy, powerful and
  violent.

58

• Even today, paramilitary bands and local police
  controlled by political bosses or landowners
  routinely threaten and/or kill peasant activists.
  The further south you go in the country, the more
  acute this problem (Chiapas Oaxaca).
• Institutional Revolutionary Party (PRI)
  controlled the federal government from 1929 to
  2000 and set policy and controlled all levers of
  political power.
• Paternalistic and all-powerful, the state
  controlled the bureaucracies that directed the
  labor unions (powerful), peasant organizations,
  student groups, and virtually every other
  dimension of organized society.
• Even though the PRI lost the presidency in 2000,
  it remains the most powerful political party.
• The PRI lost power because a series of economic
  crises alienated the upwardly mobile
  middle-class.
• In 2000 Vicente Fox headed a coalition of
  parties that adopted the name Alliance for Change
  and promised Mexicos electorate Revolution of
  Hope he promised to be a citizen president.

59

• Economic Crisis
• In the 1970s the PRI undertook economic
  policies designed to foster rapid and sustained
  economic growth (import substitution).
• Borrowed heavily to fund and achieved economic
  growth of 8.
• Backed by its vast deposits of petroleum, the
  PRI recklessly borrowed to expand its economic
  infrastructure.
• Petroleum prices plunged in 1981-82 debt
  crisis. By the end of 1982 40 of Mexicos export
  earnings were devoured in interest payments on a
  debt of 80bil.
• IMF set as a condition for emergency funding a
  drastic reduction in state spending ? layoffs,
  reduced spending on social welfare programs.
  Devastated the poor and reduced the standard of
  living of the middle class.
• In December 1994 the economy collapsed after the
  government could no longer sustain an overvalued
  peso.
• The peso fell 50, while the stock market fell
  38. Ushered in another round of public austerity
  (Pres. Zedillo) and was the final ingredient in
  bringing down the PRI.

60

• US engineered a bailout by backing (attached
  loan guarantees Brady bonds) a new issuance of
  Mexican government bonds.
• NAFTA (1992) hope was that it would shore up
  the Mexican economy and generate jobs. It has for
  Mexico so that now Mexico is the third largest
  trading partner of the US. A new trade agreement
  between Mexico and the EU signed in 2000.
• Resulted in the globalization of Mexico.
• Analysts have noted that NAFTA has contributed
  to a trend toward more representative government
  and that globalization has undercut the
  state-centered regime of the PRI.
• Still, there are far to many Mexicans who live
  below the poverty level. Of the 40 million poor,
  18 million are characterized as living in
  extreme poverty (less than 2 a day).
• Income distribution is skewed with the richest
  20 in control of 58 of the nations wealth
  while the poorest 20 control only 4.
• Questions on Mexico?

61

• Chapter 4 Latin Americas Debt Crisis The
  Limits of External Financing
• The debt crisis in Latin America was a
  development crisis.
• The reasons for a debt crisis include
• A chronic deficit in the non-interest current
  account balance.
• A rise of import costs or a decrease in export
  earnings.
• World capital markets lose confidence capital
  inflows dry up.
• Borrowing is not necessarily bad (investment vs.
  current consumption).
• Definition of a Debt Crises A debt crisis arises
  when countries fail to meet their interest and/or
  principal payments.
• There are three ways to service national debt
• First, the non-interest current account can be
  brought into a surplus balance.
• Obtain newly borrowed money from international
  sources in order to cover old debts.
• Other capital inflows such as from foreign
  direct investment.
• Note Overvalued exchange rates and capital
  flight contribute to debt crises.
• ? Over-invoicing of imports and under-invoicing
  of exports?
• Causes foreign asset accumulation but goes
  into black market.

62

• The 1980s Debt Crisis
• Gradual failure of ISI policies during late 60s
  and early 70sgt need for external money to
  support.
• Yom Kipper war gt OPEC raises price of oil gt
  stagflation in developed countries gt OPEC money
  floods Eurocurrency market gt growth looked
  relatively good in Latin America because of ISI
  insulation gt money flowed in from Europe gt
  feeding virtuous cycle of growth.
• US Federal Reserve acted to stop inflation (80
  81) gt drained money from US system gt caused
  interest rates to skyrocket gt US economy went
  into a sharp contraction gt Latin exports to US
  tumbled gt balance of payments quickly
  deteriorated and economies stalled.
• Currency overvaluation and capital flight during
  1978-1982 contributed to the debt crisis.
• Mexico 1982 (OPEC loses controloil prices
  drop).
• ? Brazil, Argentina and Venezuela got into
  similar trouble shortly thereafter.
• ? A sovereign guarantee
• ? external debt to exports or debt service to
  export ratio (table 4.6)
• ? Other terminology in box on page 90.

63

• Many nations were unable to sustain positive net
  exports and struggled under the dead weight of
  ISI gt political and economic inertia gt The Lost
  Decade
• Debt Crisis Management
• What was "the muddling-through strategy?
• Assumed that debtors would regain their
  credit-worthiness with a combination of internal
  adjustment and more favorable world economic
  conditions.
• Assumes problem is a liquidity not a structural
  problem.
• Wrong! Led to depressed living conditions,
  hyperinflation, sharply reduced investment, and
  reduced long term growth rates.
• What is conditionality?
• Debt-equity swaps.
• Debt for nature swaps.
• Buybacks of debt.
• Debt facilities organized by creditor governments
  (Paris Club).
• Relief on interest payments rather than principle.

64

• 7. Provisioning increased private financial
  sector set aside profits before dividend payments
  against risky loans (protects capital base in
  case of client default).
• 8. Development of secondary market for developing
  country debt (Mexico ? .51 on each dollar of
  outstanding debt Peru (1987) ? .02 to .07 to
  the 1)
• 9. The Baker Plan (October, 1985)
• Plan to jump-start regional growth.
• Premise countries in region could not repay
  external debts in the context of contractionary
  policies (IMF conditionality). Plan was to shift
  debt crisis policy from austerity to growth.
• Targeted 15 LDCs for 29 billion of new money
  (20 from banks and 9 from IMF/World Bank).
• Was a formal recognition that the problems were
  structural rather than of a liquidity nature ?
  caused policy shift at IMF to tie future loans to
  growth targets.
• Still, it was too little too late money spread
  too thinly to have major impact (almost 1
  trillion of debt involved).

65

• 9. The Brady Plan first proposed in 1985 but
  didnt get underway until 1989.
• Asked banks to forgive part of their loans to
  debtor countries in exchange for limited
  guarantees of repayment of remaining outstanding
  debt.
• Three options
• 1 decrease face value of debt (sanctioned
  buy-back in secondary markets)
• 2