The Lost Decade

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The Lost Decade

• Jose M. Gonzalez
• Linda Jung
• Icee Paramio

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Before Crisis

• The Oil crisis of 1973 and 1979.
• Petroleum Exporting Countries (OPEC) amassed
  wealth, and banks were eager to lend billions of
  dollars.
• Twenty years of aggregate economic growth
  (1960-1980).
• 120 million Latin Americans or 39 of the
  region's population lived in poverty.
• In 1977 exports a share of Latin Americas GDP
  amounted as to only 10 percent.
• U.S. Stagflation in 1970s (a period where
  inflation ?, slow-to-no output growth ?,
  unemployment ?, and eventually recession).

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Oil Prices!
10/06/-10/26/1973 Israel, Egypt, Syria, and Iraq
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The Original Sin!!

• Consist when countries are enable to borrow money
  in their currency and instead borrow the currency
  of the lenders.
• Variable Interest Rate

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Latin American Debt
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1970s Oil Dollar Recycling
Developing Countries
Loans for Development
Projects
Oil Payments
International Commercial. Banks
OPEC
Dollar
Deposits
Oil Payments
Develop Countries
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Anti-Inflation Campaign

• Paul Volcker Chairman of the FED in 1979-87
• Anti-inflation campaign.
• From 1979-80, The FED tightened money supply.
• Dollar interest went up!.
• Succeeded in stopping the global inflation of the
  70s.

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Effects On Latin America

• Debt service payments also rose sharply.
• Due to Global recession, the demand for their
  exports fell.
• As commodity prices declined, they faced lower
  terms of trade ( x price / M price)

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External Causes

• Oil Shocks of the 70s
• Global Economic Slowdown.
• Mexicos Breakdown in 1981.

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Internal Causes

• Heavy Government borrowing from international
  private banks.
• Borrowing for national development programs
  instead of developing the export base.

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During the Crisis

• Crisis occurred after many economic bumps in
  Mexico and several other Latin American economies
  already overburdened with increasing percentage
  of worlds outstanding debt.
• Debt crisis occurred when international capital
  markets became aware Latin America could not
  payback its loans.

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Mexicos Default

• In August 1981, Mexico Finance Minister, Jesus
  Silva-Herzog, announced that Mexico would no
  longer be able to pay its debts.

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Mexico and its Oil

• Oil producing nation
• Benefited from oil shock in the 1970s
• Able to exploit the high oil prices
• Increased oil exports from 600 million in 1976
  to 14 billion in 1981
• Non-oil exports deteriorated while imports grew
  contributing to current account deficit

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Latin Americas Borrowing

• After Mexicos default, most commercial banks
  reduced or stopped new lending to Latin America
• Loans were short-term
• Refinancing rejected
• Billions of dollars of loans that would have been
  refinanced, were due immediately

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Decrease in Export Revenues

• Commodity prices dropped in early 1980s
• Latin America countries focused on exporting
  primary goods
• Decrease in export revenues

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Latin America Debt Crisis

• Drop in export earnings compounded with increase
  in interest rates by US new monetary policy
• Most Latin American nations held short term loans
• None of debtor nations could pay back the
  billions that were now due with the international
  banks

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Pressure for Payment

• As result of Mexicos defaults and other economic
  pressures, flow of external credits to Latin
  America decreased after 1982 and creditors
  demanded payment
• Large interest payment
• In 1984, interest due on debt as ratio of GNP of
  the region reached 5

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Paying Off the Debt

• Long process of adjustment beginning with shift
  in trade balance
• Went from trade deficit of 2 billion in 1981 to
  trade surplus of 31 billion in 1983, mostly
  transferred abroad in form of interest payments
• Latin America nations adopted tight fiscal and
  monetary policy

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Paying Off the Debt

• Many countries nationalized masses of debt
  accumulated by private sector
• Latin America became net-exporter of capital
  between 1982-1985, paying over 106 billion in
  interest payments
• Most countries forced to renegotiate terms of
  debt

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Paying Off the Debt

• IMF helped by coordinating international credit
  and debt renegotiations lasting into late 1980s
• Long term effects included recession
• Real GDP growth for region only 2.3 between 1980
  and 1985 but in per capita terms Latin America
  experienced negative growth of almost 9

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Latin America GDP Growth
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GDP per capita
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L/T Expansionary Fiscal Policy
DD1
DD2
E1
E2
E3
AA1
AA2
Y
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Role of the IMF in the Crisis

• Blamed domestic mismanagement
• IMF policy package devaluation, reduction of
  fiscal deficits, decreases in real wages,
  relaxation of controls on trade and capital
  flows, elimination of subsidies
• Stabilization
• Inflationary controls

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Critique on the IMF

• Criticisms against the IMFs Neoliberalist
  approach
• Importance of government
• Reduction of disposable income, disappearance of
  middle class (consumers of local goods), decline
  in access to basic/public goods

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Critiques on the IMF

• Devaluation
• Useless with global economic slowdown
• Not as effective when adapted by many countries
  at a time
• Might erode investor confidence
• Wage repression
• Sacrifice of salaried workers to finance payments
• Increase in the already high unequal distribution
  of wealth

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Critiques on the IMF

• Loose capital controls
• Empirical evidence points to otherwise

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Latin America Under the IMF
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Latin America Under the IMF
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Latin America Under the IMF
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Latin America Under the IMF
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IMFs Goals

• To facilitate balanced international expansion
  and growth
• To contribute to the promotion and maintenance of
  high levels of employment and real income
• To avoid competition due to depreciation of
  exchange rates

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Alternatives

• Dialogue between debtors and creditors
• Social/political cost perspective vs
  financial/technical perspective of borrowing
• Cooperation with North America and advanced
  economies
• Consolidation of collective financial funds
• Support countries with fewer resources
• Multi-regionalism collaboration programs with
  neighboring countries
• Increase savings in isolated economies

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Alternatives

• Wage freeze instead of wage cuts
• Develop domestic financial markets and capital
  controls

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Latin America Now

• Growth still falls short of other developing
  regions
• Higher export volumes and remittances from abroad
  expanded GDP
• Creation of MERCOSUR in the 1990s
• Job creation and increasing real wages
• Decreasing external debt, accumulation of foreign
  assets and development of financial markets
• Problem of inequality and poverty still prevalent

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Thank you!