PSCI 4356 Lecture 3: Development Finance

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University of Texas at Dallas
Political Science
PSCI 4356
Peinhardt Clint

5102017 OneNote Online Development Finance Monday, April 10, 2017 8:34 AM Where do they get their capital? Domestic savings Historically the best way to grow an economy Loans from foreign commercial banks Foreign aid Foreign direct investment Foreign portfolio investment Stock holders, bond buyers These options have changed in their relative importance over time Postwar through Oil Crisis We begin to see the World Bank move into a development role More countries gain independence during this time period, become developing countries G77 and Nonaligned markets OPEC forms in the 1960s, starts to double oil prices in the 1970s Incredibly successful in power, many other cartels have failed First Oil Crisis Inflation around the world, averages around 10 Recessions, industrial output drops by 10 Bank failures Work stoppages, strikes, and general panic Leftist parties take power throughout Europe, political instability prevents monetary policy tightening Third World Effects Two different stories between oil importers vs. exporters Cost of maintaining ISI increases Petrodollars flooded the amount of capital for lending, developing countries were able to borrow Second Oil Crisis Same losers, same winners Even bigger growth rate on these financial flows Debt Crisis Mexico first domino in a chain of defaults Goal to contain the crisis and prevent damage to US banks Attempt to prevent default, Fed arranged shortterm loans to Mexico Meanwhile, the IMF tried to work out a longterm solution Initial assessments suggested the debt problem was a temporary problem (liquidity) It was really a matter of insolvency, LDCs could not service debts without major economic reforms This debt problem moved throughout most of the developing world The Baker Plan US frustrated by repeated dealings with individual countries made a onesizefitsall plan More emphasis on supplyside measures Vague promises for new commercial loans Expanded lending via IMF and World Bank No debt reduction No new US resources Citibank Finally decided in 1987 they would set a 3 billion loss on these debts The Brady Plan 1989, created a system of bonds backed by the US government Finally a return of bond markets in developing markets Causes of the Crisis First, debt accumulation Lenders were looking for better returns Financial instruments (syndication spread risk) Countries risks were ultimately correlated Floating rate loans protected lenders against losing money Changing external conditions US and other OECD countries increase interest rates to tackle inflation This increases LIBOR, which then increases the rates on most loans held by developing countries This makes OECD markets more attractive, capital seeks higher returns there US dollar increases in value as result Sovereign loans were denominated in dollars, so cost of debt increased again!45798cid=15cdbb404d6f9171app=OneNoteauthkey=!Al 13
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