1. Latin America and the Debt Crisis Michael Henderson Paula Ramko Lance Gomes Ildiko Kiss

2. What was the debt crisis?  Individual countries could no longer make payments on their debt  Interest payments are financed by: 1.Current Account surpluses 2.New debt issues 3.Other capital inflows (Foreign Direct Investment)

3. Why does a debt crisis occur?  Deficits in the non-interest current accounts (fiscal disorder)  World economic shocks hurt terms of trade  Non-debt capital inflows dry up  Loss of confidence of the world capital markets

4. Why did the debt crisis occur?  Economic growth under ISI was funded by issuing debt (external savings)  Private sector could not fund large capital requirements  Debt trap –Investments had VERY long time horizons –Unproductive investments  Economic Populism: Buying off the masses (Peron) –Emphasized growth and income redistribution –Tax collection was poor or nonexistent

5. Why did the debt crisis occur?  Populism: inefficiency and corruption in state firms – (Brazil and Mexico)  Argentina used debt to defend fixed currency  Negative real interest rates (1970’s)  External shocks: –Oil prices plunged (lost income) –Real interest rates rose (borrowing more expensive) –Global recession  Creditworthiness – banks would not roll over loans  Capital flight leading to devaluation

6. Results of the debt crisis  Pegged currencies were unstable  High interest rates  Recession  Hyperinflation

7. Debt Indicators YearTotal Debt/ Exports of goods Total Debt/ GNP Interest/ GNP 1982269.146.95.3 1983309.158.65.6 1984291.459.35.5 1985312.961.35.5 1986376.663.24.6 1987377.666.14.6 1988332.656.74.1

8. Impact on local business (inflation)  Uncertainty  Increased velocity of money (money spent as soon as it came in)  Speculation  Reduced investments in business  Barter  Capital flight  Fewer types of investment sources available  Less liquid, robust currency exchange market

9. Impact on local business  Businesses must determine industrial development sought by govt.  Monitor the RBI and agriculture strategies  Determine if govt is structuralist or monetarist  Use policy categories to understand national strategy and the instruments govts use to implement policies (p. 89)  Identify how policies will affect operations

10. Doing business in midst of a debt crisis  Focus on intra-regional trade activities, among Latin American countries  Concentrate on developing less capital intensive industries (service industry)  Focus on producing necessities (food) instead of luxury goods for the local market  Increase export of high-quality, higher margin products to generate foreign currency