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Balance of Payments, Developing-Country Debt, and The Macroeconomic Stabilization Controversy

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52 views

Balance of Payments, Developing-Country Debt, and The Macroeconomic Stabilization Controversy

Help.for.the paper

Uploaded by

Fahad khan
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 13

Balance of
Payments,
Developing-Country
Debt, and the
Macroeconomic
Stabilization
Controversy

Copyright © 2009 Pearson Addison-Wesley. All rights reserved.


The Balance of Payments

• The current account: net flow of


merchandise trade

• The capital account: net flow of


financial capital

Copyright © 2009 Pearson Addison-


Wesley. All rights reserved. 13-2
The Balance of Payments

The current account:

• Exports (+)
• Imports (-)
• Investment income (+)
• Debt-service payments (-)
• Net remittances and transfers (+)
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-3
The Balance of Payments

The capital account:

• Direct private investment (+)


• Foreign loans (+)
• Foreign assets of domestic banks (-)
• Resident capital outflow (-)

Copyright © 2009 Pearson Addison-


Wesley. All rights reserved. 13-4
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-5
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-6
The Balance of Payments

• The balance of payments position:


– Surplus: inflows > outflows
– Deficit: outflows > inflows

• Consequence:
– Surplus: increase in cash reserves account
– Deficit: decrease in cash reserves account
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-7
Payments Balances on Current
Account, 1980–2006 (billions of
dollars)

Copyright © 2009 Pearson Addison-


Wesley. All rights reserved. 13-8
Consequences of BOP Deficit

• Reduce cash reserves account

• Inhabit imports: impose tariffs/quotas;


foreign exchange devaluation

• Increase exports: foreign exchange


devaluation
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-9
Consequences of BOP Deficit

• Impose restrictive fiscal and monetary policy

– Reduce income expansion to lower import growth


– Reduce inflation for exports to compete internationally

• Attract direct foreign investment

• Receive a greater share of the IMF’s “paper gold”


known as the Special Drawing Rights (SDRs)

• Increase external debt


Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-10
Third World Debt Crisis

• The accumulation of external debt Since


early 1980s

• Allocation of a larger percentage of the GDP


(from export earnings) to service external
debt

• Scarcity of development funds: lack of


investment in physical, human, and social
capital© 2009 Pearson Addison-
Copyright
Wesley. All rights reserved. 13-11
Dimensions of the LDC Debt
Burden, 1970–2008

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Wesley. All rights reserved. 13-12
Severely Indebted Countries

• Large outstanding debt

• Debt as a large percentage of GDP and


exports

• High debt service-to-GDP (or GNI) ratio

• Copyright
High debt service-to-exports
© 2009 Pearson Addison- ratio
Wesley. All rights reserved. 13-13
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-14
External Debt Accumulation

Define Fn as the capital inflow (i.e., the


amount of debt accumulation)

Fn = dD
D = total external debt
d = percentage increase in total external
debt
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-15
External Debt Accumulation

• Define BT as the basic transfer and r as


average interest rate charged on external
debt

BT = dD – rD = (d - r)D

- dD: external debt


- rD: amortized debt
- d>r: debt accumulation
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-16
The Debt Crisis

• Rising d and d > r

• Switching from fixed, concessional rates to


short-term, variable rates

• BOP deficits as LDCs’ commodity prices


plummeted
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Wesley. All rights reserved. 13-17
The Debt Crisis

• Global recession, reducing demand for LDC


exports

• Lack of confidence in LDCs’ ability to repay


foreign loans

• Substantial amount of capital flight from the


LDCs
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-18
Petrodollars and Third World
Debt

The OPEC (i.e., Qatar, Saudi Arabia, Kuwait):


• Exports oil to LDCs and MDCs
• Deposits some of their export earnings in Western
banks
• Provides grants and interest-free loans to LDCs

Western Banks:
• Lend petrodollars to LDCs
• Receive
Copyright © 2009 Pearson
debt Addison-
service payments from LDCs
Wesley. All rights reserved. 13-19
The Mechanics of Petrodollar
Recycling

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Wesley. All rights reserved. 13-20
The IMF Stabilization Policy

• Remove foreign exchange and import controls

• Use a floating foreign exchange rate

• Adopt stringent anti-inflationary policy


– Increase interest rates
– Reduce budget deficits
– Control wage increases
– Eliminate price subsidies

• Invite foreign investment and improve economic


openness
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-21
The IMF Stabilization Policy

Success in LDCs:

• Reduce inflation
• Improve balance of payments
• Eliminate parallel exchange rates
• Improve economic efficiency

Copyright © 2009 Pearson Addison-


Wesley. All rights reserved. 13-22
The IMF Stabilization Policy
Failure in LDCs:

• Double standards
– Harsh adjustments for the LDCs
– No adjustment for the MDCs

• Lending agencies
– Agents of international capitalism
– Increase LDC dependence and poverty
– Prefer short-term to long-term developmental loans
– Provide
Copyright © 2009
funds Pearson Addison-
for corrupt LDC governments
Wesley. All rights reserved. 13-23
Global Dimensions of LDC Debt

• Restructuring of short-term to long-term loans


• Debt forgiveness to selected LDCs if they
continue to use IMF stabilization policy
• Debt-for-equity swap: banks exchange loans for
ownership of domestic industries
• Debt-for-nature swap: MDC government forgive
loans if LDCs invest in preserving the
environment
Copyright © 2009 Pearson Addison-
Wesley. All rights reserved. 13-24
Has the Debt Crisis Disappeared?

No! Debt crisis is just postponed!

• LDCs continue to borrow


• LDCs continue to make large debt service
payments
• In addition to the severely indebted LDCs,
countries in Africa are greatly dependent on
external debt

Copyright © 2009 Pearson Addison-


Wesley. All rights reserved. 13-25

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