Cause & Effect of Latin American Debt Crisis of the 1980’s

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The Latin American Debt Crisis of the 1980's

The paper will focus on the cause and effect of the debt crisis in Latin America in the 1980's.

1. What lead up to the crisis?
2. How was the economy doing before and after the crisis
3. Which countries was affected, and the ramifications around the world.
4. What was the effect of the crisis?
5. What policies had to be implemented, and are they still in place today?
6. Who was to blame for the crisis?
7. Why Latin America?
8. How the crisis spread from each country.
9. How the outside world reacted, and assisted in helping or/and increasing the crisis.
10. What have we learned from the crisis and what are we still doing wrong?
11. What other debt crisis has occurred since?
12. Any similar crisis?
13. A bit about the U.S direction and its future and past impact.
14. Chinas growing influence in the world economy and in their action in avoiding debt crisis in other countries.
15. Comparison and contrast with the South East Asian crisis in 1997.
16. Europe's current debt crisis and the comparison and contrast it has with the Latin American debt crisis.
a. What is similar?
b. What is different?
c. Solving the same way?
d. Outside world react similar?
e. China's role now heavier?

The tendency of debt crisis to occur in different part of the world, and why history tend to repeat itself, and we do continue to fall into debt crisis. One region of the world seems to have a serious crisis from time to time. Why does this phenomenon occur? Is there any particular economic politic that determines a debt crisis?

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Assignment Solution

The Latin American Debt Crisis of the 1980's

The 1980s were a period of economic distress with high levels of inflation and debt levels for the Latin American countries. These countries (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and Venezuela) dismal growth rates lead to this decade being called the 'lost decade' for them. In this paper, we will see the factors which led to the debt-crisis, the consequences and the response mechanisms which these countries and external lending institutions adopted, how the other parts of the world were affected with a particular emphasis on the United States. Towards the latter half of the paper, we will examine the ongoing European debt crisis, and China's role in the global economy.

The Latin American countries at the onset of the eighties had a large Balance of Payments (BOP) deficits, high rates of inflation and large chunks of their economies were the public sector

(Altmir,Devlin 1993). Crude oil was experiencing high rates and hence oil exporting countries like Venezuela were able to manage the economies with the oil export income. Countries like Brazil, which did not have much oil exports started an import substitution industrialization program to enhance its self-reliance, and also took large loans from commercial banks(Bruno, 1988).

The US Federal Reserve in 1982 adopted a monetary policy which had a second-order effect of making US compete with Latin American countries for global credit.The Fed Reserve's policy was aimed at controlling inflation in USA, however for Latin American countries it had a three-fold effect:US wanted cheaper global credit making it compete it with Latin American countries on lookout for the same;the cost of credit was made expensive in USA which made the Latin American countries borrow at higher rates and also the European countries increased their rates of credit to prevent a credit outflow(Agarwal 1991).For Latin American countries whose main export revenue was through oil exports had another setback by way of a steep decline in oil prices, and this made the repayment of national debts more difficult.The BOP problems of the Latin American countries bought in International Monetary Fund (IMF) and the World Bank's efforts: its solution was a debt-relief with rescheduling of payments; and structural reforms in the domestic economy.With these efforts, the inward looking economic policies of Latin American countries took a back-seat, and more neo-liberal strategies (Devlin, FFrench-Davis, 1995) were adopted. The Latin American countries went for a model of import restriction rather than export promotion. They had a negative net financial transfer (as the interest and principal payments were greater than the new loans).There was a flight of capital in anticipation that the currencies of the Latin American countries would undergo a devaluation. The higher global interest rates meant higher interest payments as the large proportion of loans was from foreign commercial banks.

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