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The 1980s Crisis - Essay Example

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The crisis in the 1980’s was a financial crisis in the Latin American countries where they came to a point that could no longer repay their foreign debts as the total amount that is payable to their loan exceeded their capacity to pay…
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The 1980s Crisis

Download file to see previous pages... This was caused by excessive and continous borrowings even at a negative interest rates and rising commodities which was aggravated by the the Organizationof Petroleum Exporting Countries (OPEC) decision to raise the price of fuel which drove the interest rate of repayment and made the Latin American countries, particularly Mexico unable to service its loans (Buerkle, 2007). II. Background In the 1960s and 1970s, Latin American countries likeArgentina, Brazil and Mexico was experiencing tremendous growth in their respective economies (Swan, 1992). They capitalized on this growth by embarking on an industrialization program and borrowed heavily from foreign creditors to finance their industrialization program particularly their infrastructure projects. Given the performance and the prospect of the economies of these Latin American countries, foreign creditors granted them loans. These loans continued that in the span of seven years (1975 to 1982) of continuous loans, it had a cumulative annual rate of 20.4 percent. This translated to the contiunous accumulation of debts. Latin American country’s loans which was only $75 in 1975 rose to a staggering amount of more than $315 in 1983. These loans already amounted half of the region’s GDP or Gross Domestic Product. As a consequence, debt payment, both on the principal and the interest, increased rapidly that it amounted to $66 billion in 1982 when debt service was only $12 billion back in 1975. The Oil Crisis When the Organizationof Petroleum Exporting Countries (OPEC) initiated in October of 1973 the increase of the world price of oil to as much as much as five times and backed by a selective embargo which was directed against the industrialized countries, Latin America and developing countries took the hit because of their vulnerability to external shocks (Street, 1978). Of the 19 countries that has to import oil, they have to pay OPEC’s increased price by an additional amount of $4.8 billion more in 1975 and added $5.2 billion in 1975 (Robichek, 1975:1). To make the matter worst, Latin American countries’ trade fell as a result of the global recession that was aggravated by the OPEC’s decision to increase the price of oil. As a result, the demand for Latin America’s primary products decreased while production cost increased because the price of imported materials from industrial nations also increased due to the increase of price in oil. This resulted to the region’s “deterioration of balance of payments current accounts of $2.5 billion above their expanded oil import costs in 1974, and of $2.9 billion in 1975” (Robichek, 1975:1). The Effect of the Oil Crisis OPEC’s decision to increase the price of oil contributed to the recession of the US economy in 1974 to 1975. This decreased the demand for loans in the domestic economy. These loans however was availed by Latin American countries which had a tremendous appetite for foreign loans (Hawkins And Maese, 1986). The global economy also slid into recession after the OPEC’s decision to increase its price in oil. The crisis that OPEC precipitated was however unusual as it transmitted even to countries that did not experience the “stagflation” of matured economies such as United States and Europe. “Until 1970, 15 Latin American countries enjoyed relative stability in the cost of living, and only 4 experienced price level increases in excess of 15 percent per year” (Inter-American Development Bank, 1977:6). Brazil which had always managed to decreased its inflation rate in the 1960s experienced an increase of 13% inflation in 1973 which increased further in 1976 to as much as 42% (International Financial Statistics, 1977:53). Its annual growth of over 10% from 1968 to 1974 fell dramatically to only 4.2% in 1975. ...Download file to see next pagesRead More
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