1. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. Chapter 13 Balance of Payments, Developing-Country Debt, and the Macroeconomic Stabilization Controversy

2. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-2 The Balance of Payments Account General considerations: – Balance of Payments (BOP) – Current Account – Surplus and Deficit – Capital Account

3. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-3 Table 13.1 A Schematic Balance of Payments Account

4. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-4 The Balance of Payments Account General considerations (cont’d) – Cash Account or International Reserve Account – Three forms: Hard currency Gold Deposits with IMF

5. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-5 Table 13.2 Credits and Debits in the Balance of Payments Account

6. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-6 The Balance of Payments Account A hypothetical illustration: deficits and debts – Current Account – Capital Account

7. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-7 Table 13.3 A Hypothetical Balance of Payments Table for a Developing Nation

8. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-8 Table 13.4 Before and After the Debt Crisis

9. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-9 The Balance of Payments Account – A hypothetical illustration: deficits and debts (cont’d) Inflow Outflow Amortization

10. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-10 Financing and Reducing Payments Deficits Some initial policy issues – International reserves – Restrictive fiscal and monetary policies: Structural adjustment Stabilization policies – Special drawing rights (SDRs)

11. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-11 Financing and Reducing Payments Deficits Trends in LDC Balance of Payments

12. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-12 Table 13.5 Summary of LDC Payments Balances on Current Account, 1980– 2006 (billions of dollars)

13. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-13 The Debt Crisis of the 1980s Background and analysis – External debt – Debt service – Basic transfer

14. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-14 The Debt Crisis of the 1980s Net capital inflow, F N, is Whered is percent increase in total debt D is total debt r is the average interest rate Basic transfer, BT, is (13.1) (13.2)

15. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-15 The Debt Crisis of the 1980s Origins of the Debt Crisis – OPEC oil price increase – Increased borrowing – Excess of imports – Lagging exports

16. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-16 Figure 13.1 The Mechanics of Petrodollar Recycling

17. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-17 The Debt Crisis of the 1980s Origins of the Debt Crisis (cont’d) – Debt-servicing obligations – Debt-service payments – Debt-servicing difficulty – Oil shocks

18. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-18 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

19. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-19 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

20. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-20 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.

21. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-21 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

22. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-22 “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

23. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-23 Resolution and Continued Vulnerabilities Highly indebted poor countries (HIPCs) Some progress but vulnerabilities remain

24. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-24 Table 13.6 Dimensions of the LDC Debt Burden, 1970–2007

25. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-25 Figure 13.2 Current Account Balances

26. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-26 Case Study: South Korea

27. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-27 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

28. Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-28 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