ECON-2220 Chapter Notes - Chapter 4: Petrodollar Recycling, Redistribution Of Income And Wealth, Populism
15 May 2018
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Study Guide on Debt Crises
Franko’s Chp 4
1. What fueled the accumulation of LAC’s external debt?
● Basically, careless borrowing: borrowing more than they could hope to repay
● First stage of ISI is driven by the import of capital goods (machinery) to be used to
produce goods domestically
● Problems arise when the borrowing requirements for long-term projects out-pace the
ability to repay past loans
● Debt trap-unproductive investments or investments with very long-term horizons that do
not generate returns in time to help service loans
2. Explain the internal and external factors explaining the debt crises in the early 1980s?
● Internal
○ Economic populism
○ Inefficiency corruption: governments overspending
■ Inefficiencies created by subsidizing a product (people use more than the
market thinks you should)
○ Inflation increased
○ Hurts government ability to pay back revenues
○ Mismatched projects and returns: projects that don’t generate returns until well
into the future. Debt was accumulated to service past debt.
○ Unsustainable domestic policies
■ Populism: use of political rhetoric to mobilize the masses
■ Economic populism emphasized growth and income redistribution and
de-emphasized the risks of inflation and deficit finance, external
constraints, and the reaction of economic agents to aggressive
nonmarket policies
● Essentially, encouraged spending, which was made possible by
favorable conditions in the international financial markets
● External
○ Negative real interest rates
○ Influx of petrodollars-->borrowing large amounts, due to initially they would be
paying back less than what they owed (really weird, you make money by
borrowing)
■ U.S. Fed raised interest rates (u.s. Fed is a leader during this period),
caused payments for Latin Americans to increase
○ Shrunk U.S. markets for Latin American exports
■ In U.S. if you raise interest rates, they consume less and save more
■ U.S. is a primary importer and now they are consuming less, so LAC
export less
○ Extraordinarily attractive international prices for capital
■ Real international interest rates were negative from 1974 to 1977
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Document Summary
Basically, careless borrowing: borrowing more than they could hope to repay. First stage of isi is driven by the import of capital goods (machinery) to be used to produce goods domestically. Problems arise when the borrowing requirements for long-term projects out-pace the ability to repay past loans. Inefficiencies created by subsidizing a product (people use more than the market thinks you should) Hurts government ability to pay back revenues. Mismatched projects and returns: projects that don"t generate returns until well into the future. Populism: use of political rhetoric to mobilize the masses. Economic populism emphasized growth and income redistribution and de-emphasized the risks of inflation and deficit finance, external constraints, and the reaction of economic agents to aggressive nonmarket policies. Essentially, encouraged spending, which was made possible by favorable conditions in the international financial markets. Influx of petrodollars-->borrowing large amounts, due to initially they would be paying back less than what they owed (really weird, you make money by borrowing)
