Life Impact | The University of Adelaide University of Papua New Guinea Economic Development Lecture 16: Balance of Payments and Macroeconomic Stability

University of Papua New Guinea Slide 1 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish Overview The balance of payments account Managing the accounts Thinking about debt… The 1980s debt crisis: a big case study! IMF stabilisation policies Tactics for debt relief (‘Mind the gap’!) Ongoing concerns

University of Papua New Guinea Slide 2 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish The balance of payments account Current account –X, M, interest/dividends from overseas I, remittances, transfers –Money coming in: +ve –Money going out: -ve Capital account (‘financial account’) –+ve: FDI, foreign loans, foreign aid –-ve: capital flight

University of Papua New Guinea Slide 3 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish Credits and debits in the Balance of Payments Account

University of Papua New Guinea Slide 4 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish The balance of payments account Cash account (‘international reserve account’) –Foreign cash reserves –Gold –Deposits with the IMF –IMF: the world’s reserve bank –Acts as balancing item in balance of payments

University of Papua New Guinea Slide 5 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish Managing the accounts International reserves can finance deficits Improving the current account: –Increase X earnings –Decrease I payments –Devaluation –Monetary and fiscal policy Improving the capital account: –FDI, foreign aid, remittances –Monetary and fiscal policy (again!)

University of Papua New Guinea Slide 6 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish Thinking about debt… The personal debt analogy Debt spirals ‘Good’ debt needs to be: –Sustainable in the long-term –For an economically productive purpose –For liquidity purposes Liquidity v solvency Basic transfer = net inflow/outflow of foreign exchange from servicing debt

University of Papua New Guinea Slide 7 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish The 1980s debt crisis (a big case study!) Pre-1980s: –Current account deficits, capital account surpluses Leading up to the 1980s: –The oil shock of 1973 – 1980

University of Papua New Guinea Slide 8 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish

University of Papua New Guinea Slide 9 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish The 1980s debt crisis (a big case study!) The oil shock: –Direct effect –Indirect effect Petrodollars, low interest rates Commercial and non-concessional The 1980s: –Situation deteriorated rapidly

University of Papua New Guinea Slide 10 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish The 1980s debt crisis (a big case study!) Why? –Oil price reversal, interest rates rise –Trying to finance the old growth rates –Fall in price of primary products –Global recessions (‘81-’82, ‘91-’93) –Increased protectionism in the developed world –Overvalued exchange rates –Private capital flight

University of Papua New Guinea Slide 11 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish The 1980s debt crisis (a big case study!) Result? –Chronically large deficits –High inflation –IMF bail-outs and…

University of Papua New Guinea Slide 12 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish IMF stabilisation policies IMF as the ‘middleman’ for international banks Conditionality as a safeguard on payment Features of policy: –Trade liberalisation –Removal of exchange rate controls –Devalue the exchange rate

University of Papua New Guinea Slide 13 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish IMF stabilisation policies Features (cont.): –Anti-inflation policies: Tightened monetary policy Fiscal austerity Controls on wage increases Removal of microeconomic policy distortions

University of Papua New Guinea Slide 14 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish IMF stabilisation policies Reception? –Anti-IMF riots –A field-day for international dependence revolution theorists…! Success? –Hard to call it successful – ‘the lost decade’ –‘Structural adjustment’ did occur, but at what cost? Case study: Mexico (Textbook p684 – 687)

University of Papua New Guinea Slide 15 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish

University of Papua New Guinea Slide 16 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish Tactics for debt relief: ‘Mind the gap!’ Debtors cartel / debt repudiation? Negotiating time periods, interest rates Debt forgiveness / Brady plan Linking repayments to export earnings Lobby for new special drawing rights from the IMF Debt for equity swaps Debt for nature swaps Lobby for recognition of ‘odious debt’

University of Papua New Guinea Slide 17 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish Ongoing concerns Sub-Saharan Africa Developing country reluctance to go to the IMF Liquidity v. insolvency again The debt trap The US deficit: – (whole thing) – (30 minute version)

University of Papua New Guinea Slide 18 Lecture 16: Balance of Payments and Macroeconomic Stability Michael Cornish