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Trade with developing countries, International Debt Crisis

Course Code
Jack Carr

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March 4th, 2009
Current news
-Industrial production is down 31% in Japan, export level decreased 46% in the last 12 months
-IMF projects that the GDP will fall in Japan in 2009 by 2.6%
-South Korea, exports fell by 33%, China- last 12 months, export fell by 44%, US export went down by 8%,
US will decline by 1.6%
Zoellick-President of the world bank: about the world crisis, what started as a financial crisis,
transformed into an economic crisis, now becoming unemployment crisis, could be not far away from
becoming human and social crisis
-in 2008, the higher food crisis, pushed 150 million people back into poverty
-in 2009, slower economic growth rate in developing countries are expected to push another 50 Million
people back into poverty
Will a major country collapse
In 2007 US, 929 billion inflow went to corporation involved in foreign direct investment
2008, 165 billion capital inflow
2009, capital outflow
-why is US dollar so high, less risk in the US perceived, china has huge foreign exchange reserve in US
-the IMF has 200 Billion available for financial assistance to any country, asked to increase it to 500
billion, Japan offered to give 100 Billion
-One economist says IMF will need 2 trillion to offer foreign assistance
Mexico-petroleum revenue is down, price of petroleum is down, if Mexico goes down, will increase risks
around the world
Reading 10.4
-Does Trade with low wage countries hurt American Workers?
-Want to expand sales to mexico, do we build in Mexico or in Ontario to export to Mexico
-Suppose the textile industry, take US and a low income country, avg wage rate of US 20$, 2$ ratio in
Low income country, want to expand sales
-losing jobs because of industries going to low income country, taking advantage of low wage rate, opp.
Cost of going to a low income country is jobs in the industrial country
-countries with high wages have high productivity, countries with low wages have low labor productivity,
have to decide the unit cost of labor, Price of labor/output
-assume that in 1 hr, US worker can produce 40 units in textiles, Thailand, can only produce 4 units
-therefore in US, wage is $20 per hour, US unit cost of labor= 0.50, in Thailand, wage rate is $2 per hour,
Thailand unit cost of labor=0.5
-When you include labor productivity, the unit cost of labor close between developing and industrial
achieved in those countries by endogenous economic strategy without any trade
-beggar thy neighbor experience, trade went down
Industrialisation first strategy-Stop-go procedure, Brazil or Argentina should establish import
substitution strategy, more growth, demand for u}]u}UÆ}v[]vP}u}Uov
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of trade deficit, had inflation emerging, balance of payment deficit, leads to capital flight, made foreign
exchange problem even more severe, country had to devalue
-Foreign exchange crisis-approach IMF for help, IMF gives out a loan with conditions, want to move
toward export, devalue currency
-economic growth stopped with the IMF program, after the balace of payment is in order, move to
industrialization once again(go), another cycle repeats, foreign exchange crisis(stop)
-each stop more severe than before
International Debt crisis
-1974, 141 Billion total amt of borrowing by developing countries, external debt
-1980, 430 Billion , 1982, 550 Billion, 1983, 620 Billion
Accelerated growth-almost as much as Asian countries
Double Deficit story-latin American countries had a foreign exchange imbalance, current account deficit,
fiscal deficit,
will not work well
Endogenous set of bad policies by the borrowing countries (Latin American), use international
borrowing to meet deficits, lack of fiscal discipline
Set of exogenous forces imposed upon the borrowing countries-fewer exports, higher interest rates
Primary impact of the debt crisis-these countries experience neg. growth in the 1980-õì[Uo}
of economic growth
This is about OPEC recycled dollars-in 1973, OPEC increased price of oil from less than 3$ to 12$ a barrel,
1979-80 2nd OPEC price increase from 12-ïð¨oUKWZZµPÀvµ]vì(}[óïU
1980, 280 Billion a year)
-many funds went to US banking system, the banks want to increase lending, 73-74 recession, business
}v[vvÁo}víõóïU}v}u]P}ÁZo}Á down, fewer needs for new loans, US looked at
Mexico(solid economic growth for 20 years), price of oil will keep increasing, Brazil(no oil), US loaned to
govt of Mexico, Brazil, Argentina, because they were running fiscal deficits,
Sol. To fiscal deficit
1) raise taxes-not a popular decision
2) u}P}À[Æv]µUµ]À]oÀvUµvo]loÇ
3) reducing subsidies for the poor, harm country
steady supply of loans, interest paid in US dollars, the US banks should not have made so many loans
(wanted more money)
International debt increased, interest had to be paid in US dollar, this solved the Latin American
countries fiscal deficit temporarily, the federal defici}µv]oUP}À[ZÀu}v]vP
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