Economic Development - DEBT CRISIS

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Foreign Loan (from government banks at market interest rates)

1980s: developing countries (how did they generate the debt crisis? how did it start?

http://dss.ucsd.edu/~jhamilto/oil_history.pdf

Origin: 1972.1973 Oil Crisis (cut in supply by OPEC - they formed a cartel and begin increasing the price of oil)

The oil crisis began when OPEC increased the prices of oil, leading to an increase in total revenue - earning a large amount of USD.

In order to keep this safe, the OPEC countries placed their USD in commercial banks in Switzerland.

In there commercial banks, the supply of USD increased, causing a fall in the interest rates.

At the same time in 1970's, there are many LDCs that have increased their demand for loans. - the government began to borrow: which borrowed at a variable i (which has been decreasing due to increase in supply of USD).

Around 1978, the increase in oil prices caused an increase in production cost, a fall in AS led to STAGFLATION.

Due to the lack of knowledge about composite problems at the time, the government would aim to counteract the inflation with contractionary monetary policies.

The fall in money supply led to increase in interest rates.

In the 1970's, Mexico, with a large supply of oil, saw the rise in prices and therefore borrowed to invest in oil extraction. However, once they managed to extract oil, the price began to fall and with rising interest rates, they went into debt default.

Commercial banks came together to have DEBT NEGOTIATION - debt cancellation, longer repayment period, and lower i.

Some countries became - Highly IPC.

DEBT CRISIS

Highly Indebted Poor Countries:

External Debt (exact)

External Debt (% of GDP)

External Debt (% of export earnings)

http://data.worldbank.org/indicator/DT.TDS.DECT.EX.ZS

List of HIPC:

http://data.worldbank.org/income-level/HPC

MARKET:

Efficient market (assuming that there is protection of property rights)

The perfect market is made up of two things:

1 - Perfect information

2 - perfect mobility of factors of production.

In some poor countries, the rural sector is often not protected in terms of ownership, and therefore leading to property disputes. - due to a poor information system.

Furthermore, the lack of information also limits the mobility of factors of production. The mobility of factors of production is split into: GEOGRAPHICAL (through infrastructure); and OCCUPATIONAL (through education)

In a developing countries, there is also the need for GOVERNMENT INTERVENTION --> to provide merit and public goods ------>

GOVERNMENT:

The government is needed for intervention to provide:

MERIT GOODS/PUBLIC GOODS

INDUSTRIALIZATION: to help with research and development

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