Chapter 13

Balance of
Payments,
Developing-Country
Debt, and the
Macroeconomic
Stabilization
Controversy

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The Balance of Payments
Account
• General considerations:
– Balance of Payments (BOP)
– Current Account
– Surplus and Deficit
– Capital Account

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Table 13.1 A Schematic Balance of
Payments Account

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The Balance of Payments
Account
• General considerations (cont’d)
– Cash Account or International Reserve Account
– Three forms:
• Hard currency
• Gold
• Deposits with IMF

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Table 13.2 Credits and Debits in
the Balance of Payments Account

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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
Debt Crisis

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The Balance of Payments
Account
– A hypothetical illustration: deficits and debts
(cont’d)
• Inflow
• Outflow
• Amortization

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Financing and Reducing
Payments Deficits
• Some initial policy issues
– International reserves
– Restrictive fiscal and monetary policies:
• Structural adjustment
• Stabilization policies
– Special drawing rights (SDRs)

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Financing and Reducing
Payments Deficits
• Trends in LDC Balance of Payments

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Table 13.5 Summary of LDC Payments
Balances on Current Account, 1980–
2006 (billions of dollars)

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The Debt Crisis of the 1980s

• Background and analysis

– External debt
– Debt service
– Basic transfer

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The Debt Crisis of the 1980s

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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The Debt Crisis of the 1980s

• Origins of the Debt Crisis

– OPEC oil price increase
– Increased borrowing
– Excess of imports
– Lagging exports

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Figure 13.1 The Mechanics of
Petrodollar Recycling

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The Debt Crisis of the 1980s

• Origins of the Debt Crisis (cont’d)

– Debt-servicing obligations
– Debt-service payments
– Debt-servicing difficulty
– Oil shocks

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The Debt Crisis of the 1980s

• Origins of the Debt Crisis (cont’d)

– Developing countries’ two options:
• Curtail imports and restrictive fiscal and monetary
measures
• More external borrowing

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Attempts at Alleviation: Macroeconomic
Instability, IMF Stabilization Policies,
and Their Critics

• The IMF stabilization program

– Macroeconomic instability
– Stabilization policies
– Four basic components of IMF stabilization program:
• Liberalization of foreign exchange and imports control
• Devaluation of the official exchange rate
• Stringent domestic anti-inflation program
• Opening up of the economy to international commerce

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Attempts at Alleviation: Macroeconomic
Instability, IMF Stabilization Policies,
and Their Critics

• The IMF stabilization program (cont’d)

– Such policies can be politically unpopular
because they hurt the lower- and middle-income
groups.
– Less radical observers view the IMF as neither
a developmental nor an antidevelopmental
institution.

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Attempts at Alleviation: Macroeconomic
Instability, IMF Stabilization Policies,
and Their Critics

• The IMF stabilization program (cont’d)

– Tactics for debt relief:
• Debtors’ cartel
• Restructuring
• Brady Plan
• Debt for equity swaps
• Debt for nature swaps
• Debt repudiation

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“Odious Debt” and its
Prevention
• What is odious debt?
– Sovereign debt used by an undemocratic
government in a manner contrary to the
interests of its people should be deemed invalid

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Resolution and Continued
Vulnerabilities

• Highly indebted poor countries (HIPCs)

• Some progress but vulnerabilities remain

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Table 13.6 Dimensions of the LDC
Debt Burden, 1970–2007

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Figure 13.2 Current Account
Balances

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Case Study: South Korea

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Concepts for Review

• Amortization • Current account

• Balance of payments • Debt-for-equity swaps
• Basic transfer • Debt-for-nature swaps
• Brady plan • Debtors’ cartel
• Capital account • Debt repudiation
• Capital flight • Debt service
• Cash account • Deficit
• Conditionality
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Concepts for Review (cont’d)

• Euro • Odious debt

• External debt • Restructuring
• Hard currency • Special drawing rights
• Highly indebted poor (SDRs)
countries (HIPCs) • Stabilization policies
• International reserve • Structural adjustment
account loans
• International reserves • Surplus
• Macroeconomic
instability
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