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POL3115 (15)

L9 - State-Market Debate

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University of Ottawa
Political Science
Modeste Mba Talla

• Relation between democracy and development. What comes first? -answer based on a case-study (ex: China & India) • Difference between the Washington Consensus and Beijing Consensus? 1- Washington Consensus – everything based on the Chinese way of doing things 2- Beijing – no political interference 3- human rights are not an issue 4- Lower interest in Beijing Consensus than Washington Consensus 5- The Chinese are always ready to adapt or immigrate March 20, 2014 State-Market Debate The Bretton Woods Institutions and Neoliberal Reform since 1981: From the Washington to the Post-Washington Consensus; Debt Crisis and Relief; Democracy and Development Debt Crisis and Relief I- Origin of debt problem • The current debt problems have their origins in the 1970s and early 1980s • The 1973 oil price hike, in particular, developing countries started to borrow money on a large scale from banks in industrialized nations -Israel • The oil-rich national deposited their sudden wealth with western banks, causing surplus liquidity among them • The rich countries were then in recession, so that the banks had few possibilities of investing their petrodollars at home • Developing countries faced considerable balance-of-payment deficits • Consequently, money was borrowed chiefly by states (and state enterprises) • Collective irresponsible acting (market failure) on the part of banks: individual analyst within the banks who prefer to ignore the risks (‘countries cannot go bankrupt’) • The banks assumed governments would come to their rescue if they should get into difficulties • They had taken on the burden of recycling petrodollars with the explicit support of their governments by channeling these surplus funds to countries that needed them • Later, problems were caused particularly by the manner and conditions under which banks lent their money • International interest rates were low at the time • Banks charged a risk premium that was far too low • The banks charged variable interest rates – rational in a time of high inflation, but also increasing the risk of default as rates rose • Governments of developing countries were tempted to borrow large amounts • The debt was accumulated not to finance productive investments, but to finance the government’s patronage employment and large military and police forces. • Corruption: there is the suspicion that some of the proceeds of foreign loans found their way into the pockets of the rulers. • Some countries, however, followed a policy that was clearly irresponsible, expressed in very large government deficits, for example – leader wants 200 cows when it’s $100,000/cow. Spending large amounts of money on unnecessary things. Not wise investments. • In LatinAmerica, in particular, investment levels were very high between 1975 and 1982 [an average of 24% of gross domestic product (GDP) higher than before 1975 and after 1982]. • The imbalance created by overwhelming levels of debt causes countries to adopt short term policies, designed to meet the next payment of interest or principal, or to sustain positions in rescheduling negotiations. II- Acceleration of debt  The debt crisis really erupted: 1980s  The volume of World Bank leans in particular few rapidly during the 1970s  A) they introduced tight monetary policies causing interest rates to shoot up  B) this led to a world-wide recession  C) debtor countries thus had to cope simultaneously with higher oil prices, higher interest rates and lower prices for their exports  Consequences: 1- In LatinAmerica, higher interest rates formed the most important reason for the rapid debt increase. 2- Africa – where official creditors usually charged a fixed interest, the main cause was the deteriorating terms of trade  On both continents: further impaired b capital flight  In 1979, the oil-producing countries again raised their prices, but this time the reaction by the industrialized countries was quite different  The announcement by Mexico in 1982 that it was no longer able to pay its debt service marked the start of the actual crisis  At the start of the 1980s, the high debt burdens of many low and middle-income countries quickly became problematic due to a number of changes in the world economy.  In 1987, the debt/GNP ratio reached the 60% level inAfrica  For the debt service-to-export ratio, a limit of 25% is usually maintained, and for the interest-to-export ratio, this is 15%  Debt itself continued to increase until 1995, as did the arrears which amounted to over US$60 billion in 1995, 1996 and 1998 – higher than they have ever been in LatinAmerica III-International responses  The debt problem was called a crisis principally because many major western banks threatened to go bankrupt and in a few cases actually did so  Initially, until about 1984, it was assumed that debtor countries were suffering temporary payment problems and that new loans would help them to recover  1985, the Baker Plan also aimed at mobilizing new funds for debtor countries: The International Monetary Fund (IMF) attempted to coordinate the banks in granting new loans  1986 – the IMF opened a concessional ‘window’for the poorest countries: first, the StructuralAdjustment Facility (SAF) and, from 1987 onwards, the Enhanced StructuralAdjustment Facility (ESAF).  There are many different options available to a country to deal with its debt problem: a) debt rescheduling b) debt repudiation c) increased borrowing d) devaluation of the domestic currency e) restricting imports, and increasing exports The Bretton Woods Institut
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