Matakuliah : <<EKONOMI PEMBANGUNAN>> Tahun : <<2009>> Balance of payments, Third World Debt, and the Macroeconomic stabilization controversy Pertemuan 9

If I were the president of Third World nation…… I would be far more frightened by a well dressed gentleman bringing loans from the IMF or Citibank than by a bearded guerrilla muttering threats of revolution. (Lewis Lapham, Imperial Masquerade, 1990) Bina Nusantara University

Material Outline Balance of Payments Financing and Reducing Payments Deficits The Third World Debt Crisis Bina Nusantara University

A Schematic Balance of Payment Account Export of goods and services A Import of goods and services B Investment income C Debt-service payment D Net remittances and transfers E Total current account balance (A – B + C – D + E) F Direct private investment G Foreign loans (private and public), minus amortization H Increase of foreign assets of domestic banking system I Resident capital outflow J Total capital account balance (G + H – I - J) K Increase (or decrease) in cash reserve account L Errors and omissions (L – F - K) M Bina Nusantara University

Positive and negative effects on balance of payment accounts Positive effects (Credits) Negative effects (Debits) 1. Any sale of goods or services abroad (export) Any purchase of goods and services abroad (import) 2. Any earning on an investment in a foreign country Any investment in a foreign country 3. Any receipt of foreign money Any payment to a foreign country 4. Any gift or aid from a foreign country Any gift or aid given abroad 5. Any foreign sale or stocks or bonds Any purchase of stocks or bonds from abroad Bina Nusantara University

Financing and Reducing Payment Detriests Some initial policy Issues : - Improve the balance on current account by promoting export expansion or limiting imports (or both) - Encouraging more private foreign direct or portofolio investment, borrowing from international commercial banks, or seeking more public foreign assistance - Seek to modify the detrimental impact of chronic balance of payments deficits by expanding their stocks of official monetary reserves Bina Nusantara University

The third World Debt Crisis : Dimensions of the crisis External Debt Debt service Basic transfer Bina Nusantara University

A serious problem arises, when : The accumulated debt becomes very large so that its rate of increase The sources of foreign capital switch from long-term “official flows” on fixed, consessional terms to short-term The country begins to experience to severe balance of payments problems as commodity prices plummet and the terms of trade rapidly deteriorate A global recession or some other external shock, such as a jump in oil prices Bina Nusantara University

A serious problem arises, when : A loss in confidence in an LDC’s ability to repay resulting from points 2,3, and 4 occurs, causing private international banks to cut off their flow of new lending Perhaps most important, a substantial flight of capital is precipitated by local residents who for political or economic reasons send great sums of money out of the country to be invested in developed country financial securities, real estate and bank accounts. Bina Nusantara University

Global dimensions of the LDC Debt Problem Restructuring Debt for equity swap Debt for nature swap Dept Repudiation Bina Nusantara University