IEU - Lecture 7 - Int lending & Financial Crises

IEU - Lecture 7 - Int lending & Financial Crises -...

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Unformatted text preview: Izmir University of Economics ECON 306 INTERNATIONAL ECONOMICS Lecture 7 International Lending and Financial Crises SCALE OF THE PROBLEM Low & Middle Income 1 2 3 4 5 6 7 1 9 7 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 500 1000 1500 2000 2500 Total debt service (% of GNI) External debt, total (BnUS$) DEBT CRISIS CAUSES OF THE DEBT CRISES 1. Oil shocks (1973 and 1979): a) Oil Price , Imports , BoP deficits , Borrowing , Debt b) Recycling of petrodollars to LDCs. 1. 1980-83 world economic recession : a) Interest rate b) Primary commodity prices c) Terms of trade (ToT) d) OECD protectionism CAUSES OF THE DEBT CRISES 1. Fallacies of Composition : During the 1980s, the pressure on debtor countries to increase export revenues contributed to a over-supply in primary products and a collapse of their prices. 2. Devaluation: Debt 3. Economic Hit Man : Confessions of an Economic Hit Man , by John Perkins. Perkins worked as a consultant to Third World Countries. We make loans to countries like Ecuador with the full knowledge that they will never repay them, In fact we do not want them to honor their debts, since the nonpayment is what gives us our leverage, our pound of flesh. The money would not actually go to the Third World country, except for grease for rulers and cronies. Instead most of it went directly to U.S. firms that ran the projects. . Then, when the scenarios didn't pan out, which was predictable, the country had no way to pay the money back. When this happens, then, like the Mafia, we demand out pound of flesh. This often includes one or more of the following: control over United Nations votes, the installation of military bases, or access to precious resources. And in Iraq we tried to implement the same policy that was so successful in Saudi Arabia, but Saddam Hussein didn't buy. When the economic hit men fail in this scenario, the next step is what we call the jackals. Jackals are C.I.A.-sanctioned people that come in and try to foment a coup or revolution. If that doesn't work, they perform assassinations. Or try to. In the case of Iraq, they weren't able to get through to Saddam Hussein. He had -- His bodyguards were too good. He had doubles. They couldnt get through to him. So the third line of defense, if the economic hit men and the jackals fail, the next line of defense is our young men and women, who are sent in to die and kill, which is what weve obviously done in Iraq. RESOLVING THE DEBT CRISIS 1. Debt Equity Swaps 1. Baker Plan (1985) 1. Bradley Plan (1989) 1. Heavily Indebted Poor Country Initiative (1996) RESOLVING THE DEBT CRISIS Source WDI, 2004 Latin America & Caribbean 10 20 30 40 50 60 70 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 1 2 3 4 5 6 7 8 9 10 Debt (%GDP) Debt service (%GNI) RESOLVING THE DEBT CRISIS Latin America & Caribbean 20 40 60...
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This note was uploaded on 08/06/2009 for the course ECONOMICS ECON 306 taught by Professor Alperduman during the Spring '09 term at Izmir University of Economics.

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IEU - Lecture 7 - Int lending & Financial Crises -...

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