Chapter 13Balance of Payments, Debt, Financial Crises, and Stabilization

Policies

13.1 International Finance and Investment: Key Issues

How major debt crises emerged during the 1980s

13.2 The Balance of Payments AccountGeneral considerations:

0 Balance of Payments (BOP)0 Current Account0 Surplus and Deficit0 Capital Account

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Table 13.1 A Schematic Balance of Payments Account

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13.2 The Balance of Payments AccountGeneral considerations (cont’d)

--Cash Account or International Reserve Account--Three forms:

Hard currencyGoldDeposits with IMF

Table 13.2 Credits and Debits in the Balance of Payments Account

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13.2 The Balance of Payments AccountA hypothetical illustration: deficits and debts

--Current Account--Capital Account

Table 13.3 A Hypothetical Balance of Payments Table for a Developing Nation

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Table 13.4 Before and After the 1980s Debt Crisis: Current Account Balances and Capital Account Net financial Transfers of Developing Countries, 1978-

1990 (billions of dollars)

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13.2 The Balance of Payments Account

A hypothetical illustration: deficits and debts (cont’d)0 Inflow0 Outflow0 Amortization

13.3 The Issue of Payment DeficitsSome initial policy issues

0 International reserves0 Restrictive fiscal and monetary policies:

0 Structural adjustment0 Stabilization policies

0 Special drawing rights (SDRs)Trends in the Balance of Payments

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Table 13.5 Developing Country Payments Balances on Current Account, 1980–2009 (billions of dollars)

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13.4 Accumulation of Debt and Emergence of the Debt Crisis Background and analysis

0 External debt0 Debt service0 Basic transfer13.4 Accumulation of Debt and Emergence of the Debt Crisis

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Net capital inflow, FN, is dDFN (13.1)

Basic transfer, BT, is

DrdrDdDBT )( (13.2)

Where d is percent increase in total debtD is total debtr is the average interest rate

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Figure 13.1 The Mechanics of Petrodollar Recycling

13.4 Accumulation of Debt and Emergence of the Debt CrisisOrigins of the 1980s Debt Crisis

-OPEC oil price increase-Increased borrowing-Excess of imports-Lagging exports

13.4 Accumulation of Debt and Emergence of the Debt Crisis (cont’d)

Origins of the Debt Crisis (cont’d)0 Debt-servicing obligations0 Debt-service payments0 Debt-servicing difficulty0 Oil shocks0 Developing countries’ two options:

0Curtail imports and restrictive fiscal and monetary measures0More external borrowing13.5 Attempts at Alleviation: Macroeconomic Instability, Classic IMF

Stabilization Policies, and Their CriticsThe IMF stabilization program

0 Macroeconomic instability0 Stabilization policies0 Four basic components of IMF stabilization program:

0Liberalization of foreign exchange and imports control0Devaluation of the official exchange rate0Stringent domestic anti-inflation program0Opening up of the economy to international commerce

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13.5 Attempts at Alleviation: Macroeconomic Instability, Classic IMF Stabilization Policies, and Their Critics

The IMF stabilization program (cont’d)0 Such policies can be politically unpopular because they hurt the lower- and middle-income

groups.0 Less radical observers view the IMF as neither a developmental nor an anti-developmental

institution. The IMF stabilization program (cont’d)

0 Tactics for debt relief:0 Debtors’ cartel0 Restructuring0 Brady Plan0 Debt for equity swaps0 Debt for nature swaps 0 Debt repudiation

13.6 “Odious Debt” and Its Prevention What is odious debt?

0 Sovereign debt used by an undemocratic government in a manner contrary to the interests of its people should be deemed invalid

13.7 Resolution of 1980s-1990s Debt Crises and Continued Vulnerabilities Highly indebted poor countries (HIPCs) Some progress but vulnerabilities remain

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Figure 13.2 Global Imbalances

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13.8 The Global Financial Crisis and the Developing Countries

Causes of the crisis and challenges to lasting recovery Economic impacts on developing countries

0 Economic growth0 Exports0 Foreign investment inflows0 Developing-country stock markets0 Aid

Economic impacts on developing countries0 Distribution of influence among developing countries0 Worker remittances0 Poverty0 Health and education0 General policy framework

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13.8 The Global Financial Crisis and the Developing Countries

Differing impacts across developing regions0 China and the exchange rates controversy0 East Asia and Southeast Asia except China0 India0 Latin America0 Africa

Prospects for recovery and stabilityOpportunities as well as dangers?

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