International Debt Crisis

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International Debt Crisis

• August 1982. A Bolt From the Blue?
• Solutions to the debt crisis and their
  consequences

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August 1982

• A Bolt From the Blue?

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The Road the Debt Crisis

• Underdevelopment the key issue
• 1947 - Rio Conference
• 1961 Alliance of Progress - 10.7b from
• 1961 to 1969

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The Road the Debt Crisis

• 1950s to 1970s Latin American economies doing
  very well.
• Economies based on help from Alliance of Progress
  and Import Substitution Industrialisation (ISI)

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Import Substitution Industrialisation

• Government orientated growth by replacing imports
  with domestic production
• Target area where net importers
• Produce these goods eventually internal
  production will mean that no longer need imports
• Need to have protection tariffs
• Inefficient and will eventually run its course

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The Road the Debt Crisis

• 1970s ISI model run its course need money to
  keep model functioning

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The Road the Debt Crisis

• Africa
• Most gain independence in the 1960s
• Independence important but a dawn of a new era?
  Perhaps politically but still underdevelopment
  mono-economies
• Need money to develop

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1970s Favourable Borrowing Conditions

• 1973 Yom Kippur War
• West awash with oil dollars and want to recycle
  them lend them
• Interest rates low below inflation

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1970s Favourable Borrowing Conditions

• Borrowed on floating interest rates
• Dollar weak
• Conglomeration of banks

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How was the money spent?

• Infrastructure Mexico City underground
• Social spending 1982 minimum wage in Mexico

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How was the money spent?

• Military military regimes in Latin America
  civil wars in Africa
• Capital flight
• Tax evasion

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What Went Wrong?

• World events turn against the Third World
• Reagan/Thatcher/Kohl in power

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What Went Wrong?

• Recession in world economy late 1970s/1980s
  demand for goods fell
• Dollar becomes more powerful Ghana and world
  price of coca

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What Went Wrong?

• Iranian Revolution world oil price increases
• New areas of oil production in the West

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What Went Wrong?

• The result is that countries now have to pay back
  more on their original loans. Where do they get
  this money?
• Borrow more money on short term loans to pay
  interest on original loans vicious cycle

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August 1982 - Mexico

• Mexico defaults on debt - can not pay debt or
  interest on it
• Start of the debt crisis
• Never happened before but Brazil follows suit in
  January 1983 2 of big 3 economies

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Conclusions

• Underdevelopment
• 1970s good time to borrow money
• End 1970s/1980s world events turn against Third
  World

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Conclusions

• Solution is to borrow even more money
• Vicious cycle that can not be sustained August
  1982 panic in debtor countries but also in the
  West