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3.27-3.29lapol - Latin American Politics 5:24:00 PM Debt...

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Latin American Politics 29/03/2007 16:24:00 March 27, 2007 – Debt Crisis and Failure of “Heterodox” Stabilization Plans Both strategies of economic policy from the 1970s in Latin America (ie – Export and ISI) – required money to fund the new policies they initiated. Oil boom of the 1970s – generated a great deal of “petrodollars” – lots of money totaled up; banks sought to invest money that people had deposited. . They had a lot of money to lend. Borrowed a huge quantity of money from international banks at low interest rates at the time – through debt instruments. They took out a lot of debt – Amount of debt – rose 10x fold in the developing world in the 1970s! So long as economies grew and interest rate remained low this was not a problem. In 1979 – raised interest rates to a 50 year high. This affected interest rates in Latin American debt. The rates in Latin America went up even more. They were all linked to US markets / interest rates. The economic crisis of the world created a drop in demand for products from Latin America. This was such a large percentage of GDP that couldn’t even pay what owed on a monthly basis. Started printing money to pay the debt; as a larger and larger % of money was linked to debt payments. 40-50% of the government revenue was paid to service debt. August of 1982 – Mexico – could no longer pay debt obligations. Other countries followed through. The renegotiation – gave leverage of the international financial institutions. They turned to the IMF – International Monetary Fund on the party of all these banks. They also gained a voice in economic policy within these countries
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Inability to meet these payments led them to stop lending to the region. Was by far the worst crisis to hit the country in the 1980s. Saw economic decline with severe inflation at the same time – stagflation. Often called the lost decade. Over the whole decade – every country in the region had a negative growth rate. This set back development in Latin America to a sizeable extent. Had considerable effect in the political realm; faced with this crisis Latin American governments had to respond in several ways. Had to stabilize the government. Stabilization means bringing inflation down. The second stage was much more drastic reform – economic LIBERALIZATION. This is more dramatic than stabilization in terms of changes in the government. Orthodox vs Heterodox stabilization – two types: Orthodox – brought down inflation simply reduced the amount of money in circulation. How do this? Cut wages / government spending. This is known as austerity policy. These types of policies are preferred on the right – by the IMF, business elites, etc. Heterodox – reduce inflation without austerity; negotiating pacts between labor, business,
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3.27-3.29lapol - Latin American Politics 5:24:00 PM Debt...

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