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ECO100Y1 (400)
Lecture

Latin American Crisis vs Asian Crisis


Department
Economics
Course Code
ECO100Y1
Professor
Jack Carr

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March 11, 2008
Ramsay wright 141 March 23 11-1pm
Ramsay wright 142 March 24 11-1pm
-fiscal deficit of industrial countries will crowd out lending to developing countries
-94 out of 116 developing countries are experiencing an economic slow down
-economic assistance is needed for countries
-no social welfare in developing countries
-export led growth developing countries will be decreased
Balance of payment deficit, federal deficit, double deficit story
-formula for successful growth for latin American countries, is expand industry with export industrial
products, need new investment new plants, new social overhead
-µ]P}À[Æv]µUZ}Á}}ZÁ]Z}µ(]o(]]
Brazil-steel export blocked by protectionism , takes a long time for countries to drop barrier
Debt crisis of latin America
-lost decade of economic growth, standard of living fell 7% in 1990 from 1980
-imports-gain foreign exchange to pay for these, imports had to be slashed, 30-40% tax, some of the
imports were necessary for economic growth, economy suffers due to lack of imports, slow growth
-]v(o]}vUÁ]v}Á}(ov]vP}]víõôîUv[µ(o(]]U]}]vu}vÇUÌ]o
had inflation rate of 1000%, huge economic costs
-capital flight, takes foreign exchange and savings out o }µvÇU}v[lv}ÁÁZv]will be back
Need stable economic policies for a period of time before people will bring money back, with lower
inflation
Williamson
How should you get your economy ordered-Washington Consensus
Want industrial countries to grow too
Effort to gain productivity, tech. transfer in Latin America was lacking
Porter, latin American countries did not take out patents from US, tech. change lacks
Meeting interest payments of debt-for Borrowing countries
-took a lot of tax, for a decade, international transfers went from developing countries to industrial
countries, only went one way, capital transfers for interest repayment
-a refinancing of debt with Mexico and US, major reorganization
1) Western banks would write down loans to 65% of par, interest rate was to be at prime+1%,
floating US prime, write off 35%, get 65% in 20 years guaranteed, if Mexico did not repay the
o}vUh^P}À[Á}µoÇZvlUîìÇh^EÁ}vo]vPZ
2) 100% return, interest 6.25% fixed
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3) 20 yr US New bonds replacing the debt at par, interest rate variable to US prime, banks had to
loan another 25% of the debt to Mexico, 100% return
40% of reorganization went to option 1, option 2, 47%, option 3, 13%
DÆ]}P}}Çð]oo]}voUZo(}(DÆ]}[Á}Pv
Capital flight is hard to follow, missing item in balance of payments
Argentina had 77% of capital flight as a percentage of international debt, Mexico had 78%, brazil had
26%.
GDP of Latin America used to be almost same as Asian countries before the debt crisis
ASIA
-Why did Thailand fail? Why was the economic failure so deep in Thailand? Why did the crisis
spread to Indonesia and South Korea particularly?
òì[Uóì[most countries should have a growth of 5%
Japan had a average growth rate of 12% per year, doubled GDP in 7 years
]vd]PUZô9(}íõõóUZ]v[P}ÁZ}Àíì9
The East Asian Miracle-World Bank
-miraculous growth 1965-1990, 8 countries
-1965-[ôìÀP}(P}ÁZÁò9vuUò}(Z}µv]Z}]vPof GDP per
capita in the world, gains from the growth, life expectancy was extended, poverty reduction, (from
58% to 17% in 1990),
-convergence of developing countries, growth rates and real GDP per capita, top 20 were Indonesia,
hong kong, Singapore, South Korea, Japan, Thailand, Canada was 27th in GDP per capita
Y hat=alpha L hat, beta K hat, TFP
Why the success of these countries up to 1990?
-savings rate and investment rate rose dramatically, education improvement, labor(ppl finding
jobs), countries in agricultural sector had strong transfer from labor to industry
-The report indicated that if you take a definite period, beta k hat and alpha L hat accounted for 2/3
of economic growth, total factor productivity was 1/3 (mostly in improved resource allocation, as
people left low paying sector to high paying sector)
Additional beneficial of economic growth
-countries adopted export-led programs
-open to foreign tech. transfer
-manageable federal deficit
-inflation rates was controlled
Phenomenal success of these Asian countries is already inspiring attempts at imitation
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