Solutions to the Debt Crisis and Their Consequences

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Solutions to the Debt Crisis and Their
Consequences
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Solutions

• US government loan Mexico 2b to service debt
  immediate panic over
• International Monetary Fund World Bank become
  involved

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Who are the IMF World Bank?

• Both created in July 1944 at Bretton Woods, New
  Hampshire conference
• Goal of conference was to establish framework for
  economic cooperation development that would
  lead to a more stable prosperous global economy

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International Monetary Fund

• The IMF is an organisation of 184 countries,
  working to foster global monetary cooperation,
  secure financial stability, facilitate
  international trade, promote high employment
  sustainable economic growth, reduce poverty.
• Gives policy advice/technical assistance makes
  loans
• Gets money from quotas each member pays in
  relation to size of economy currently has 46b
  in gold holdings

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World Bank

• Promotes long-term economic development/poverty
  reduction by providing technical/financial
  support to help countries reform particular
  sectors of economy or implement specific projects
• Housing/schools/education etc

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Solutions

• Impose conditions for lending money
• Structural Adjustment Programmes (SAPs)
• Each different but 4 things in common
• (1) currency devaluation
• (2) removal or reduction of state workings in
  economy
• (3) Elimination of subsidies
• (4) Trade liberalisation

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Solutions

• Creditors only speak to individual debtor
  countries
• Baker Plan 1986 give 20b to 15 largest
  debtors and hope this encourages growth of
  economies
• Brazil debt in 1986 100b

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Solutions

• Brady Plan 1989 banks sell off debt at 20
  discount but Latin America hoped for 50
• Situation not helped by population
  increasing/unemployment/environmental problems
  droughts/AIDS in Africa

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Mexico

• In the 1980s under de la Madrid appeared to be
  coping
• Privatisation in 3 stages including
  Telemex/Aeromexico/Mexicana but never PEMEX

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Mexico

• Reduction in government spending state
  monopolies in road construction and tortilla
  subsidies gone
• Appearing to go against heritage 1989 100
  foreign ownership allowed/1991 Article 27
  eijodos
• Appeared to be doing well as membership of North
  American Free Trade Agreement (NAFTA) on 1
  January 1994

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Solutions

• Exactly same things taking place elsewhere in
  Latin America Africa
• 1986 currency devaluation of leone in Sierra
  Leone
• Bar of soap 0.5 to 2 leone
• Gallon of kerosene 9 to 23 leone
• Standard of living suffering

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• Any other options open to countries?

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Peru The Country Who Dared Say No

• During inauguration speech of Alan Garcia in 1985
  said only pay 10 of annual exports on servicing
  debt needed money to help stimulate economy
• Froze both wages/prices 1 off devaluation
  knocked 3 000s off sol in new curreny - inti

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• IMF not happy since what if others followed
  same path? Fidel Castro saying same thing

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Peru The Country Who Dared Say No

• Peru got away with this for a while
• Scared rest do the same
• Let stew in own juices
• Debt less than others so stakes not so high
• August 1986 ineligible for loans by IMF worst
  credit rating in the world

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Peru The Country Who Dared Say No

• Did not really work as needed international
  trade/materials/food had to go back into
  international fold
• Large amounts of money spent on military as had
  to fight Shining Path
• No other countries sided with Peru pariah state
• Hurt relations with US

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Conclusions

• IMF/World Bank to the fore
• SAPs
• Baker/Brady Plans but really drop in the ocean
• Population up/ urbanisation/unemployment/environme
  ntal problems/AIDS not helping

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Conclusions

• Some countries appear to be coping - Mexico
• Peru tried different path but did not work