1. Foreign Debt & Financial Crises

2. A Nation’s Balance of Payment Balance of Payment Indicators Merchandise Trade Merchandise Trade trade in tangible goods between nations trade in tangible goods between nations Service Trade Service Trade Trade in intangible goods, i.e., insurance Trade in intangible goods, i.e., insurance Investment Income & Payment Investment Income & Payment Interest & dividend payments Interest & dividend payments Remittances & Official Transactions Remittances & Official Transactions Migrant worker income Migrant worker income Cost paid to government employee overseas Cost paid to government employee overseas

3. A Nation’s Balance of Payment When Balance of Payment Appears It is viewed by realists as a sign of poor competitive performance It is viewed by realists as a sign of poor competitive performance Adjustment measures to be taken: Adjustment measures to be taken: Monetary policy Monetary policy Adjust the volume of money supply Adjust the volume of money supply Central bank limiting public access to loans by raising interest rates, for example Central bank limiting public access to loans by raising interest rates, for example Fiscal policy Fiscal policy Lower government spending Lower government spending Raises taxes to limit purchasing power Raises taxes to limit purchasing power Commercial policy Commercial policy Increase export & decrease import Increase export & decrease import

4. A Nation’s Balance of Payment Basis of the Adjustment Measures External adjustment External adjustment Impose most of the adjustment costs on foreigners Impose most of the adjustment costs on foreigners Apply tariffs, impose import quotas and export subsidies Apply tariffs, impose import quotas and export subsidies Devalue own currency Devalue own currency Internal adjustment Internal adjustment Cool down domestic economy Cool down domestic economy Discourage spending by businesses & government Discourage spending by businesses & government Levy higher taxes and increase interest rates Levy higher taxes and increase interest rates Discourage individual spending Discourage individual spending Unemployment, closure of businesses & fewer government projects Unemployment, closure of businesses & fewer government projects

5. A Nation’s Balance of Payment Basis of the Adjustment Measures Financing/Borrowing Financing/Borrowing Seek financing from external sources Seek financing from external sources Decrease own foreign exchange holding Decrease own foreign exchange holding

6. A Nation’s Balance of Payment Third Word Debt Crisis Signs of Crisis A liquidity problem A liquidity problem Temporary debt problem: payments can be deferred and repaid later on terms acceptable to creditor A solvency problem A solvency problem Unsustainable debt problem: loss of credit for the debtor unless the creditor reduces principal and interest payments Debt crises may begin as liquidity problems turns into solvency problems.

7. A Nation’s Balance of Payment Third Word Debt Crisis Origin Time: August 1981 Main debtor countries (1982) Country Debt $ Debt Service Ratio (debte as of % of export income) Brazil: $92 bn81.3% Brazil: $92 bn81.3% Mexico: $86 bn56.8% Mexico: $86 bn56.8% Argentina: $43 bn 50% Argentina: $43 bn 50% Venezuela: $32 bn29.5% Venezuela: $32 bn29.5% Korea: $37 bn22.4% Korea: $37 bn22.4% Philippines: $24 bn42.6% Philippines: $24 bn42.6%

8. A Nation’s Balance of Payment Third Word Debt Crisis Explaining the Crisis Historical structuralists’ explanation Historical structuralists’ explanation Irresponsible lender behavior Irresponsible lender behavior Over-lending by commercial banks Over-lending by commercial banks Northern governments encouraged private bank loans to the South Northern governments encouraged private bank loans to the South Liberal/Orthodox liberal explanation Liberal/Orthodox liberal explanation The Southern countries borrow commercial bank loans to avoid IMF-imposed structural adjustment conditions The Southern countries borrow commercial bank loans to avoid IMF-imposed structural adjustment conditions Misuse of loans in poor projects Misuse of loans in poor projects Reacted slowly to signs of problems Reacted slowly to signs of problems Poor economic development policies, e.g., protectionist import substitution (do not embrace globalization) Poor economic development policies, e.g., protectionist import substitution (do not embrace globalization)

9. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism Kwame Nkrumah & the Attack on Neo- colonialism Kwame Nkrumah & the Attack on Neo- colonialism Who was Nkrumah? Who was Nkrumah? Leader of Ghana, 1st black African state that gained independence (1957) Believing formal independence was the condition for national development. Nkrumah wrote Neocolonialism: The Last Stage of Imperialism to explain why formal independence had failed to facilitate development. Nkrumah wrote Neocolonialism: The Last Stage of Imperialism to explain why formal independence had failed to facilitate development.

10. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism Nkrumah Nkrumah Arguing that Lenin had failed to anticipate neocolonialism Arguing that Lenin had failed to anticipate neocolonialism Neocolonialism had prevented prosperity of the newly independent states Neocolonialism had prevented prosperity of the newly independent states What’s neo-colonialism? What’s neo-colonialism? States that are subject to neo-colonialism are independent in theory; they have all the outward trappings of sovereignty States that are subject to neo-colonialism are independent in theory; they have all the outward trappings of sovereignty

11. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism What’s neo-colonialism? What’s neo-colonialism? In reality, their eco system and thus their pol policy are directed from the outside In reality, their eco system and thus their pol policy are directed from the outside The aim of this external control was to exploit, not to develop. The aim of this external control was to exploit, not to develop. Neo-colonialism is the worst form of imperialism. For those who practice it, it means power without responsibility and for those who suffer from it, it means exploitation without redress. Neo-colonialism is the worst form of imperialism. For those who practice it, it means power without responsibility and for those who suffer from it, it means exploitation without redress.

12. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism What’s neo-colonialism? What’s neo-colonialism? “A state in the grip of neo-colonialism is not master of its own fate.” “A state in the grip of neo-colonialism is not master of its own fate.” Why did the industrialized nations need neo- colonialism? Why did the industrialized nations need neo- colonialism? Need to appease workers angered by the cumulative costs of WWI, the Depression, and WWII Need to appease workers angered by the cumulative costs of WWI, the Depression, and WWII Need to build welfare states, but could not pay for it without continued exploitation of Africa and Asia Need to build welfare states, but could not pay for it without continued exploitation of Africa and Asia

13. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism Why did the industrialized nations need neo- colonialism? Why did the industrialized nations need neo- colonialism? To pay for a welfare state, grant formal independence to the former colonies while maintaining enough external control to continue exploitation. To pay for a welfare state, grant formal independence to the former colonies while maintaining enough external control to continue exploitation. How did the industrialized nations maintain control over the former colonies? How did the industrialized nations maintain control over the former colonies? “Free trade” made post-colonial states exporters of primary products and importers of manufactured goods “Free trade” made post-colonial states exporters of primary products and importers of manufactured goods

14. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism How did the industrialized nations maintain control over the former colonies? How did the industrialized nations maintain control over the former colonies? Capital flows and interest rates were controlled by the rich countries Capital flows and interest rates were controlled by the rich countries Political, military and cultural means for maintaining control Political, military and cultural means for maintaining control

15. A Nation’s Balance of Payment Third Word Debt Crisis Objectives of Crisis Resolution Preventing collapse of int’l banking & financial systems Preventing collapse of int’l banking & financial systems Restoring capital market access for the debtor countries Restoring capital market access for the debtor countries Minimizing economic dislocation and restoring economic growth in debtor countries Minimizing economic dislocation and restoring economic growth in debtor countries Measures for Achieving the Objectives Emergence measures & involuntary lending Emergence measures & involuntary lending Short-term emergency loans to Mexico, Brazil, and Venezuela Short-term emergency loans to Mexico, Brazil, and Venezuela Government and IMF pressured private banks to continue to loan to debtor countries Government and IMF pressured private banks to continue to loan to debtor countries IMF assumes more lending and pressures for adjustment of the debtor coutries IMF assumes more lending and pressures for adjustment of the debtor coutries

16. A Nation’s Balance of Payment Third Word Debt Crisis Measures for Achieving the Objectives The Baker Plan The Baker Plan Postponement of some debt payments Postponement of some debt payments Provision of new loans Provision of new loans Changes in debtor country policies Changes in debtor country policies The Brady Plan The Brady Plan Debt reduction or partial forgiveness of debt Debt reduction or partial forgiveness of debt Acceptance of IMF and World Bank conditions Acceptance of IMF and World Bank conditions The Heavily Indebted Poor Countries (HIPC) initiative The Heavily Indebted Poor Countries (HIPC) initiative Reduction of debts of eligible countries to a sustainable level Reduction of debts of eligible countries to a sustainable level

17. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism Kwame Nkrumah & the Attack on Neo- colonialism Kwame Nkrumah & the Attack on Neo- colonialism Who was Nkrumah? Who was Nkrumah? Leader of Ghana, 1st black African state that gained independence (1957) Believing formal independence was the condition for national development. Nkrumah wrote Neocolonialism: The Last Stage of Imperialism to explain why formal independence had failed to facilitate development. Nkrumah wrote Neocolonialism: The Last Stage of Imperialism to explain why formal independence had failed to facilitate development.

18. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism Nkrumah Nkrumah Arguing that Lenin had failed to anticipate neocolonialism Arguing that Lenin had failed to anticipate neocolonialism Neocolonialism had prevented prosperity of the newly independent states Neocolonialism had prevented prosperity of the newly independent states What’s neo-colonialism? What’s neo-colonialism? States that are subject to neo-colonialism are independent in theory; they have all the outward trappings of sovereignty States that are subject to neo-colonialism are independent in theory; they have all the outward trappings of sovereignty

19. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism What’s neo-colonialism? What’s neo-colonialism? In reality, their eco system and thus their pol policy are directed from the outside In reality, their eco system and thus their pol policy are directed from the outside The aim of this external control was to exploit, not to develop. The aim of this external control was to exploit, not to develop. Neo-colonialism is the worst form of imperialism. For those who practice it, it means power without responsibility and for those who suffer from it, it means exploitation without redress. Neo-colonialism is the worst form of imperialism. For those who practice it, it means power without responsibility and for those who suffer from it, it means exploitation without redress.

20. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism What’s neo-colonialism? What’s neo-colonialism? “A state in the grip of neo-colonialism is not master of its own fate.” “A state in the grip of neo-colonialism is not master of its own fate.” Why did the industrialized nations need neo- colonialism? Why did the industrialized nations need neo- colonialism? Need to appease workers angered by the cumulative costs of WWI, the Depression, and WWII Need to appease workers angered by the cumulative costs of WWI, the Depression, and WWII Need to build welfare states, but could not pay for it without continued exploitation of Africa and Asia Need to build welfare states, but could not pay for it without continued exploitation of Africa and Asia

21. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism Why did the industrialized nations need neo- colonialism? Why did the industrialized nations need neo- colonialism? To pay for a welfare state, grant formal independence to the former colonies while maintaining enough external control to continue exploitation. To pay for a welfare state, grant formal independence to the former colonies while maintaining enough external control to continue exploitation. How did the industrialized nations maintain control over the former colonies? How did the industrialized nations maintain control over the former colonies? “Free trade” made post-colonial states exporters of primary products and importers of manufactured goods “Free trade” made post-colonial states exporters of primary products and importers of manufactured goods

22. A Nation’s Balance of Payment Interpreting the Cause of Third Word Debt Crisis A continuing legacy of colonialism A continuing legacy of colonialism Neo-colonialism Neo-colonialism How did the industrialized nations maintain control over the former colonies? How did the industrialized nations maintain control over the former colonies? Capital flows and interest rates were controlled by the rich countries Capital flows and interest rates were controlled by the rich countries Political, military and cultural means for maintaining control Political, military and cultural means for maintaining control