Internal reasons:
Country's policies potentially affect a country’s vulnerability to debt-serving problems, particularly if the external economic environment becomes unfavorable.
According to Cuddington( 1989, pp32), the policies would effected include external borrowing strategy, exchange rate management, trade orientation and aggregate demand policies. This essay would explain two key policies.
Foreign borrowing policy
When considering the foreign borrowing policy, two questions need to be addressed:
Did the developed countries borrowed too much and Were the borrowed funds used efficiently?
1) Did the developed countries borrowed too much?
Statistical evidence showed that at the year of 1983,$315 billion borrowed by Latin America, or 50% of its GDP. So obviously the borrowed amount is over its payback ability.
2) Were the borrowed funds used efficiently?
Ostensibly, the funds were intended to help to finance productive development projects,such as factory and manufacturing line. Some of the funds did go for such purpose such as Brazil, which achieved significant advances in its industrial infrastructure during the 1970s. But for the most parts, the loans financed less respectable activities. The Latin American borrowing was wasteful or unjustified in that it primarily financed projects such as consumptions of high living by the elites, government deficits and capital flight. Between 1976-81, total amount borrowed that estimated by all Latin countries amounted to $272.9 billion, 91.6 percent went for capital flight, debt servicing, and building up dollar reserves. Only 8.4 percent was used for domestic investment, and of that, much was squandered. In Africa, the magnitude of borrowing was only a small fraction of that...
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...ey were not successful. Inefficient Industrialization emerged due to insufficient domestic market to support the production of many manufactured products. Limited market size of Latin American countries constrained the effectiveness of ISI. Also, due to the protectionism of local government of local industries, many sectors could produce inefficiently, and charging higher prices than foreign counterpart suppliers. Another reason for higher cost was due to the ISI process became highly dependent on foreign capital import and expensive production technologies. What's more, the ISI model also create unemployment. The evidence shows that in 3 decades when ISI was put in place in Latin America, the increase rate of labour force always higher than the rate of employ needs, due to combined effects of internal migration and use of modern labour saving production technology .
...on because most of Latin America states depended on import and export tariffs. They needed import and export tariffs to charge high taxes in order to create a healthy economy. But there were no import or exports trades to tax from. These factors weaken the economy, there was no other solution but to borrow money. In most cases borrowing money was fatal because there was no money to pay back. Most liberal governments often defaulted by borrowing money.
The basic model employed after Cardenas to promote growth in the Mexican economy was Import Substitution Industrialization (ISI), whereby Mexico attempted to build domestic industry and a domestic market. The strategy quickly started paying dividends, and the “import-substitution policies of the Mexican state were successful in generating rapid and sustained economic growth” (Sharpe 28). ISI ushered in the “Mexican Miracle” of economic growth; the Mexican growth hovered around 6% annually for some thirty years (Hellman 1). The government created incentives for investment and lowered taxation to spur domestic investment. Despite the strong economic indicators, the spoils of growth were not shared by many.
Moreover, the Roosevelt Corollary was passed by President Theodore Roosevelt and affirmed that the United States has the right to intervene in Latin America in order to alleviate the economies of Latin American countries that were unable to pay their international debts. The Roosevelt Corollary resulted in U.S. involvement in various countries throughout Latin America, explicitly the Dominican Republic, Cuba, and Nicaragua. In the Do...
The Alliance for Progress program was initially met with open arms by most Latin Americans leaders and immediately boosted U.S. relations throughout the hemisphere.1 The alliance’s charter was signed by all members of the organization except for Cuba at a special meeting at Punta del Este, Uruguay, on August 17, 1961.2 The drafters of the charter emphasized that the twin goals of economic development and social injustice should be pursued simultaneously and that both should be paralleled by efforts to expand political freedom in the hemisphere. One of the most important factors of the program was the promotion of self-help. Under the alliance’s charter, the participating Latin American countries would provide eighty percent of the funding and the remaining twenty would be pledged by external sources, which would be furnished by the United states, other wealthy countries, and a variety of public and private groups. Though created to ensure the improvement of Latin America, there were many dilemmas within the Alliance for Progress. The program was not really an alliance and it did not progress satisfactorily.
It, however, was a sales pitch to continue Latin America’s subordinate position in the global market. As a result, much of Latin America, from the late 1980 through the early 1990s, transitioned into this form of “democracy”. Consequently, Latin America suffered and still suffers today from underdevelopment, high levels of socioeconomic inequality, and immigration. Globalization of capital, off-shore production, and new technologies have created structural barriers and have led to economic and social inequalities among the Latino communities in the U.S. Politically, the program changes the control of the political system to less direct coercive rule. Economically, it eliminated state intervention in the economy; this allowed the adjusting of local economies to serve the global economy instead of their national economy.
Many years of war made Latin America’s economy suffer, and made it almost impossible to be able to recover from their debt. A stable economy was crucial to be able to gain credibility, from other countries so that investments would continue. In Peru, for example the silver mines and machinery where destroyed beyond repair. “Horrendous economic devastation had occurred during the wars of independence. Hardest hit were…Peruvians silver mines. Their shafts flooded, there costly machinery wrecked.” 120(Chasteen ). This made Peru suffer greatly because this was one of their main trades. In Mexico, one of their largest economic struggles was the lack of transportation infrastructure, meaning that Mexico did not have railroads. Mexico also lacked navigable rivers which made it much harder to be able to...
...l power in Latin American. The United States didn’t engage in classic direct imperialism which is colonialism, but engage in indirect imperialism which focused on controlling and intervening in the economic and social institutions of Latin America. The United States only cared for their economic well-being. They didn’t care the suffering the people of Latin America were going through. The United States only cared that their economic interests were thriving in Latin America. The policies the United States government undertook clearly show this. The policies of Roosevelt’s corollary and Taft’s dollar diplomacy only mention the United States’ interests. There is nothing about the Latin American’s interests and well-being. Many people suffered because of the United States’ policy that only supported and protected the rich and powerful corporations.
All but four countries in the world has external debt (“Country Comparison: Debt External”). Having a debt is almost as common as having a mortgage. Since its establishment, The United States has always been in debt (“Historical Debt Outstanding – Annual”). The US national debt has had five sharp increases previously in its history. The reasons include civil car and the two World W...
"The Latin American Debt Crisis In Historical Perspective." Policy Dialogue. Columbia University, n.d. -. Web. The Web.
...Lower Public Debt, Structural Reforms Critical, says IMF’, IMF Country Report. International Monetary Fund, Washington, D.C. No. 11/181.
The Latin American Debt crisis did not occur over night, the crisis was many years in the making and signs of its arrival were prominent in Latin American society. The reasons for its occurrence are also expansive; some fault can also be place in countries outside of Latin America. The growth rate in the real domestic product of many Latin American countries grew at a constantly high rate in the decade prior to the crisis in the 1980s, this growth led to an increase in foreign investment, corporate investment, and the world began supporting these developing nations (Ocampo). The foreign investments into Latin America created a new international financial system that gave the foreign banks access the funds to give massive loans to the developing nations of Latin America. However, the affluence was not continuous. A rise in natural resources occurred in the mid-1970s, which led to increase the prices of imported goods, and thus Latin American countries would have to find a way to pay back these deficits, which then led them to borrowing more money. By the end of the 1970s, Latin America was in debt to for over $150 billion, and the growth rates for each nations debt varied greatly with Mexico and Brazil taking on more than half of the debt themselves.
... However, their one size fits all policies can sometimes harm the countries they are trying to help, especially developing countries. Their neoliberal policies often create problems in the soft sectors, including education, health, and housing. This problem could be credited to the institutions, especially the IMF, which are largely comprised of macro-economists who specialize in short-term macro-economic stabilization, when developing countries need fundamental reform for the long term (Murtaza 2). These institutions should also take into account the unique circumstances of each individual country they work with in order to create policies that cater to the specific interests of each country and prevent as many negative consequences for the people as possible.
Difficulties in Formulating Macroeconomic Policy Policy makers try to influence the behaviour of broad economic aggregates in order to improve the performance of the economy. The main macroeconomic objectives of policy are: a high and relatively stable level of employment; a stable general price level; a growing level of real income (economic growth); balance of payments equilibrium, and certain distributional aims. This essay will go through what these difficulties are and examine how these difficulties affect the policy maker when they attempt to formulate macroeconomic policy. It is difficult to provide a single decisive factor for policy evaluation as a change in political and/or economic circumstances may result in declared objectives being changed or reversed. Economists can give advice on the feasibility and desirability of policies designed to attain the ultimate targets, however, the ultimate responsibility lies with the policy maker.
The stability of currency values plays a significant role for economic and financial stability. It is not difficult to see the exchange rate fluctuations are widely regarded as damaging. As the movements of the exchange rate have significant and large effects on the trade balance, resource allocation, domestic prices, interest rate, national income and other key economic variables. Then can exchange rate movements be predicted by these fundamental economic variables?
In 1973 the first oil shock caused some problems for Brazil. Even though Brazil is very rich in natural resources, it depends on imported oil. The government had to borrow money, but 50% of foreign debt was done by state owned ent...