1. Chapter 13
Balance of Payments, Developing-Country Debt, and the Macroeconomic Stabilization Controversy

2. The Balance of Payments Account
General considerations:
Balance of Payments (BOP)
Current Account
Surplus and Deficit
Capital Account
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3. Table 13.1 A Schematic Balance of Payments Account
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4. The Balance of Payments Account
General considerations (cont’d)
Cash Account or International Reserve Account
Three forms:
Hard currency
Gold
Deposits with IMF
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5. Table 13.2 Credits and Debits in the Balance of Payments Account
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6. The Balance of Payments Account
A hypothetical illustration: deficits and debts
Current Account
Capital Account
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7. Table 13.3 A Hypothetical Balance of Payments Table for a Developing Nation
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8. Table 13.4 Before and After the Debt Crisis
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9. The Balance of Payments Account
A hypothetical illustration: deficits and debts (cont’d)
Inflow
Outflow
Amortization
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10. Financing and Reducing Payments Deficits
Some initial policy issues
International reserves
Restrictive fiscal and monetary policies:
Structural adjustment
Stabilization policies
Special drawing rights (SDRs)
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11. Financing and Reducing Payments Deficits
Trends in LDC Balance of Payments
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12. Table 13.5 Summary of LDC Payments Balances on Current Account, 1980–2006 (billions of dollars)
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13. The Debt Crisis of the 1980s Background and analysis External debt
Debt service
Basic transfer
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14. The Debt Crisis of the 1980s Net capital inflow, FN, is (13.1)
Basic transfer, BT, is
(13.2)
Where d is percent increase in total debt
D is total debt
r is the average interest rate
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15. The Debt Crisis of the 1980s Origins of the Debt Crisis
OPEC oil price increase
Increased borrowing
Excess of imports
Lagging exports
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16. Figure 13.1 The Mechanics of Petrodollar Recycling
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17. The Debt Crisis of the 1980s Origins of the Debt Crisis (cont’d)
Debt-servicing obligations
Debt-service payments
Debt-servicing difficulty
Oil shocks
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18. The Debt Crisis of the 1980s Origins of the Debt Crisis (cont’d)
Developing countries’ two options:
Curtail imports and restrictive fiscal and monetary measures
More external borrowing
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19. The IMF stabilization program
Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization Policies, and Their Critics
The IMF stabilization program
Macroeconomic instability
Stabilization policies
Four basic components of IMF stabilization program:
Liberalization of foreign exchange and imports control
Devaluation of the official exchange rate
Stringent domestic anti-inflation program
Opening up of the economy to international commerce
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20. The IMF stabilization program (cont’d)
Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization Policies, and Their Critics
The IMF stabilization program (cont’d)
Such policies can be politically unpopular because they hurt the lower- and middle-income groups.
Less radical observers view the IMF as neither a developmental nor an antidevelopmental institution.
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21. The IMF stabilization program (cont’d)
Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization Policies, and Their Critics
The IMF stabilization program (cont’d)
Tactics for debt relief:
Debtors’ cartel
Restructuring
Brady Plan
Debt for equity swaps
Debt for nature swaps
Debt repudiation
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22. “Odious Debt” and its Prevention
What is odious debt?
Sovereign debt used by an undemocratic government in a manner contrary to the interests of its people should be deemed invalid
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23. Resolution and Continued Vulnerabilities
Highly indebted poor countries (HIPCs)
Some progress but vulnerabilities remain
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24. Table 13.6 Dimensions of the LDC Debt Burden, 1970–2007
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25. Figure 13.2 Current Account Balances
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26. Case Study: South Korea
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27. Concepts for Review Amortization Balance of payments Basic transfer
Brady plan
Capital account
Capital flight
Cash account
Conditionality
Current account
Debt-for-equity swaps
Debt-for-nature swaps
Debtors’ cartel
Debt repudiation
Debt service
Deficit
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28. Concepts for Review (cont’d)
Euro
External debt
Hard currency
Highly indebted poor countries (HIPCs)
International reserve account
International reserves
Macroeconomic instability
Odious debt
Restructuring
Special drawing rights (SDRs)
Stabilization policies
Structural adjustment loans
Surplus
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