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1980s Latin America Debt Crisis - Essay Example

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Latin American countries followed a heavy reliance on debt finance. First, increases in foreign debt in these countries were higher than the revenues they had derived from their annual exports. In 1976, Mexico exported oil which paved the way for excess imports since cheap loans can be readily tapped…
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1980s Latin America Debt Crisis
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1980s Latin America Debt Crisis

Download file to see previous pages... Latin American countries followed a heavy reliance on debt finance. First, increases in foreign debt in these countries were higher than the revenues they had derived from their annual exports. In 1976, Mexico exported oil which paved the way for excess imports since cheap loans can be readily tapped. Brazil implemented a program of industrial expansion. Argentina and Chile established an overvalued exchange rate policy as an integral part of anti-inflationary strategy. Diverse government policies led these Latin American countries to defective exchange rate policies and excessive dependence on external capital flows.Another factor for the persistent debt problem was the fact that state enterprises became the conduit for absorbing external resources. The government guarantee provided for foreign denominated loans was attractive to external lenders who had no information on the real risk profile of the debtors. Public enterprises implemented programs of investment which guaranteed direct control over the foreign exchange proceeds to the national government. (Wesson, 9)In the years after 1983, these countries suffered from capital outflows and from the persistent slide in primary commodity prices. From 1983 up to 1986, Latin American terms of trade declined by 15 percent. Increased exports were negatively affected by falling prices. Countries. Argentina and Peru were especially hard hit. Mexico went into crisis due to falling oil prices in 1986.The lingering imbalance in the U.S. balance of payments contributed to the disadvantage of Latin America. The United States buys manufactured imports from Asian Countries (NICs) while shutting off capital flows from Latin American countries. Japanese and European surpluses were sent to the United States to get higher rates of investment.
Economic growth in Latin America was supported by an import-substitution industrialization which protected the domestic industrial economy by means of high tariffs, import duties, and government subsidies. The initial arrangement benefited the economy but by the late 1960s, it was beginning to negatively affect agriculture which provides the needed foreign exchange. The industry had expensive domestic inputs that resulted in making major Mexican agricultural exports uncompetitive. Government policies which controlled domestic food prices also discouraged the increase of food production.
As the population increased, consumption rose, reducing the amount of food available for export. It became necessary either to generate more resources to satisfy the demands of the population, or to control or decrease such demands without undermining the peace of the ruling party.
By 1970, Lus Echeverra Alvarez, was elected president. He implemented the policy of stabilizing development. Stabilizing development is the economic strategy which emphasized growth over equity. The assumption had been that these resources would trickle down to the poor. The Echeverra administration opted for a strategy of shared development. This policy would emphasize equity and growth by policies that channel a greater share of economic gains to Mexico's lower classes. Echeverra encouraged more aggressive trade unions and he rued that foreign investors and domestic businessmen for exploiting the country. As conflict increased and confidence in the administration's policies declined, capital flight began. The government was forced to devalue the Mexican peso twice.
Echeverra's anger and dismay led him to expropriate vast tracts of private agricultural land to give them to landless peasants. The president's attempt to spend his way into growth and equity had clearly failed by 1976, when Jos Lpez Portillo succeeded him. Portillo assumed a conciliatory approach in the face of problems. He then decided to secure foreign funding using the vast petroleum reserves of Mexico. Finally, commercial bankers were lining up to lend Mexico money in an attempt to reinvest billions of petrodollars that Arab governments had placed on ...Download file to see next pagesRead More
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