Foreign

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Chapter 15
Norton Media Library
Chapter 15
Foreign Debt
Dwight H. Perkins Steven Radelet David L. Lindauer
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• Following WWII, Mexico borrowed little from
  international banks and foreign investors (shares
  in local firms) and official lenders (i.e WB)
• In late 1960s and 1970s the capital market
  instruments got more sophisticated and costs
  fell.
• Mexico and many other countries started to look
  for more financing
• Mexico foreign borrowing has tremendous impact on
  its economic growth, macroeconomic stability, job
  creation, and political dynamics

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• In 1970 Mexico foreign borrowing from private
  creditors was 1 of GDP
• 1980 8 of GDP.... more than half of the debt
  was short term had to be repaid within 1 year
• At first, borrowing seemed to help GDP per
  capita rose 2.4 1972-1981
• But it turned out that Mexico had borrowed too
  much too quickly
• In 1982 Mexico announced it could not service its
  debts

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• Investment fell, negative growth rates....
• Mexican crises cascaded out to many other
  heavily-borrowed-developing countries
• Some countries are still affected!
• By 2003, developing countries as a whole were
  repaying more to official creditors than they
  were borrowing!

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• Since the 1980 several countries in the region
  have experienced a surge in economic development
  and have initiated debt management programs in
  addition to debt relief and debt rescheduling
  programs agreed to by their international
  creditors. The following is a list of external
  debt for Latin America

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Country External Debt Year
Mexico 274.800 2011
Cuba 13.100 2005
Bolivia 6.430 2005
Honduras 4.675 2005
Costa Rica 3.633 2005
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ADVANTAGES AND DISADVANTAGES OF FOREIGN BORROWING

• Prudent borrowing has been an important part of
  the development strategy for some developing
  countries
• Most countries in Western Europe (And USA in 19th
  century) relied on foreign borrowing to finance
  its development strategy.
• Borrowing permits a country to invest more than
  it can save and import more than it can export
• If the additional funds finance productive
  investment sufficient returns
• recall that low-income countries have the
  potential to realize higher rate of return!

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• Therefore, foreign borrowing can help support
  growth and development and yield attractive
  returns to lenders
• Some countries prefer foreign borrowing over
  FDI..... can you explain?
• Think Tax holiday, ownership, fast and ease....
• Yet debts must be paid
• Borrowing to finance consumption or bad
  investment!

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Debt sustainability

• How much aggregate debt can a country take before
  it begins to get into trouble?
• As long as the countrys loan can be serviced,
  the loan is sustainable
• Different factors determine countrys ability to
  repay debt
• Debt size, trade and budget deficit, interest
  rate on debt, loan mix, GDP growth rate, economic
  factors, exports, government revenues
• Debt service the amount due for principle and
  interest payments in a given year

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Countrys Capacity to Pay

• 3 measures
• GDP, exports, and government tax revenues
• The larger a countrys productive capacity and
  corresponding income, the greater its ability to
  repay debt
• For foreign debt, the countrys ability to earn
  the dollars (or other currencies) needed to repay
  the debt dominated to foreign currency is
  important

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Escape from the crises, for some countries

• Refinancing making new loans to repay the old
• Rescheduling to allow longer repayment and
  possibly low interest
• Reduction
• Buyback the debtor buys the loan from the
  creditor
• Debt-equity swaps creditors are given equity in
  a company in return for eliminating the debt
  outstanding

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Conclusion

• Advantages and disadvantages of foreign debt
• loans solve liquidity problems not economic
  crises!
• Utilization of foreign loans?
• Absence of economic vision
• Foreign loans and macroeconomic policy
• Independence and freedom?

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Table 15.1
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Table 15.2
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Table 15.3
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Table 15.4
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Table 15.5
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Table 15.6
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Table 15.8
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End Chapter 15
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This concludes the Norton Media LibrarySlide Set
for Chapter 15
Economics ofDevelopmentSIXTH EDITION
By Dwight H. Perkins Steven Radelet David L.
Lindauer