Chapter 13

Balance of Payments, Debt, Financial Crises, and Stabilization

Policies

13.1 International Finance and Investment: Key Issues

How major debt crises emerged during the 1980s

13.2 The Balance of Payments Account

General considerations:
0 Balance of Payments (BOP)
0 Current Account
0 Surplus and Deficit
0 Capital Account

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 Table 13.1 A Schematic Balance of Payments Account

13.2 The Balance of Payments Account

General considerations (contd)
--Cash Account or International Reserve Account
--Three forms:
Hard currency
Gold 13-2
Deposits with IMF
 Table 13.2 Credits and Debits in the Balance of Payments Account

13.2 The Balance of Payments Account

A hypothetical illustration: deficits and debts
--Current Account
--Capital Account

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Table 13.3 A Hypothetical Balance of Payments Table for a
Developing Nation

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Table 13.4 Before and After the 1980s Debt Crisis: Current Account Balances
and Capital Account Net financial Transfers of Developing Countries, 1978-
1990 (billions of dollars)

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 13.2 The Balance of Payments Account
A hypothetical illustration: deficits and debts (contd)
0 Inflow
0 Outflow
0 Amortization

13.3 The Issue of Payment Deficits

Some initial policy issues
0 International reserves
0 Restrictive fiscal and monetary policies:
0 Structural adjustment
0 Stabilization policies
0 Special drawing rights (SDRs)
Trends in the Balance of Payments

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Table 13.5 Developing Country Payments Balances on Current Account,
19802009 (billions of dollars)

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 13.4 Accumulation of Debt and Emergence of the Debt Crisis
Background and analysis
0 External debt
0 Debt service
0 Basic transfer
13.4 Accumulation of Debt and Emergence of the Debt Crisis
Net capital inflow, FN, is

FN dD (13.1)
Basic transfer, BT, is

BT dD rD (d r ) D (13.2)
Where d is percent increase in total debt
D is total debt
r is the average interest rate
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 Figure 13.1 The Mechanics of
Petrodollar Recycling

13.4 Accumulation of Debt and Emergence of the Debt

Crisis
Origins of the 1980s Debt Crisis
-OPEC oil price increase
-Increased borrowing
-Excess of imports
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-Lagging exports
 13.4 Accumulation of Debt and Emergence of the Debt Crisis (contd)
Origins of the Debt Crisis (contd)
0 Debt-servicing obligations
0 Debt-service payments
0 Debt-servicing difficulty
0 Oil shocks
0 Developing countries two options:
0 Curtail imports and restrictive fiscal and monetary measures
0 More external borrowing
13.5 Attempts at Alleviation: Macroeconomic Instability, Classic IMF
Stabilization Policies, and Their Critics
The IMF stabilization program
0 Macroeconomic instability
0 Stabilization policies
0 Four basic components of IMF stabilization program:
0 Liberalization of foreign exchange and imports control
0 Devaluation of the official exchange rate
0 Stringent domestic anti-inflation program
0 Opening up of the economy to international commerce

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13.5 Attempts at Alleviation: Macroeconomic Instability, Classic IMF Stabilization
Policies, and Their Critics
The IMF stabilization program (contd)
0 Such policies can be politically unpopular because they hurt the lower- and middle-income
groups.
0 Less radical observers view the IMF as neither a developmental nor an anti-developmental
institution.
The IMF stabilization program (contd)
0 Tactics for debt relief:
0 Debtors cartel
0 Restructuring
0 Brady Plan
0 Debt for equity swaps
0 Debt for nature swaps
0 Debt repudiation
13.6 Odious Debt and Its Prevention
What is odious debt?
0 Sovereign debt used by an undemocratic government in a manner contrary to the interests of
its people should be deemed invalid
13.7 Resolution of 1980s-1990s Debt Crises and Continued Vulnerabilities
Highly indebted poor countries (HIPCs)
Some progress but vulnerabilities remain

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Figure 13.2 Global Imbalances

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 13.8 The Global Financial Crisis and the Developing Countries

Causes of the crisis and challenges to lasting recovery

Economic impacts on developing countries
0 Economic growth
0 Exports
0 Foreign investment inflows
0 Developing-country stock markets
0 Aid
Economic impacts on developing countries
0 Distribution of influence among developing countries
0 Worker remittances
0 Poverty
0 Health and education
0 General policy framework

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 13.8 The Global Financial Crisis and the Developing Countries

Differing impacts across developing regions

0 China and the exchange rates controversy
0 East Asia and Southeast Asia except China
0 India
0 Latin America
0 Africa
Prospects for recovery and stability
Opportunities as well as dangers?

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