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LATIN AMERICA DEBT CRISIS 

 ARTICLE ON

LATIN AMERICA DEBT

CRISIS

SUBJECT: SEMINAR IN ECONOMIC POLICY 

Submitted by:

HINA ASLAM 54572

Submitted to:

Sir QAZI SALMAN 

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LATIN AMERICA DEBT CRISIS 

SIGNIFICANCE OF THE ARTICLE: 

A vast variety of articles has been written on this topic i-e “LATIN AMERICA

DEBT CRISIS of 1980s” that clearly highlights the causes of the article. Few

articles have also been written on the management of the debt crisis. Thisarticle not only debate about the background origin and causes of the crisis,

but also underlines the steps that were undertaken to overcome the crisis. This

will help other countries not only to identify the mistakes that lead to this crisis

but will also help indebted countries to learn lessons from these mistakes and

take actions for rectification of flaws in their strategies and policies.

SITUATION IN LATIN AMERICA BEFORE CRISIS:

Mexico, Central America and South America combine and form the region of 

Latin America. It consists of 21 countries including Brazil, Chile, Venezuela,

Peru etc. The development in economy was dependent on the export of primary 

products. The products of Latin America: coffee, tin, beer, sugar, copper,

nitrates, oil and other minerals had a large demand in the world. I this era,

Import-Substituting Industry emerged in Latin America as a leading sector. In

1950s, remarkable development was made in the education sector also to

improve the development in economy.

HOW DID THE CRISIS STARTED?

During Second World War, the economy of Latin America is badly affected

because the sources of supply, export market, shipping services and credit

facilities were in danger. The export of Latin America was lost by almost 30%.

On the other hand, the import of consumer goods and heavy machinery from

U.S in Latin America rose significantly. The Leaders of Latin America wanted to

foster the growth of the country. They took loans from U.S for Big Projects

Paradigm including hydroelectric and irrigation projects and the construction

of transportation infrastructure. These projects expected to give return in

future but demanded investment now. These projects either did not start or

started but not finished. This situation resulted in negative balance of tradebetween U.S and Latin America.

In 1950s and 1960s the economy of Latin America showed growth up to 6%

annually. This growth attracts U.S corporations to invest in the market of Latin

America. International banks support this investment and a new market is

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LATIN AMERICA DEBT CRISIS 

emerged called Eurodollar market. This market helps the U.S banks to gain

access to the market to provide loans to these countries.

In 1960s OPEC (organization of petroleum exporting countries) was formed to

control the prices of oil in international market. It includes the countries thatare oil exporters. In 1973, the world economy went into the recession. The oil

prices skyrocketed (due to Suez Canal crisis). This increase in oil price was

favorable for OPEC but cause serious problem for those countries that did not

produced oil and import oil from OPEC. The national income of these oil

importing countries significantly falls because they had to pay more for

importing oil. The Situation in Latin America also worsen because they had to

paid more on import of oil and their export decreased. The national income of 

the country declined but the income of OPEC was increasing rapidly. This

money then accumulated in the international banks. Now the international

banks wanted to earn some return on this money. They sent their

representatives to the developing countries whose income had fallen and

import rose. These representatives offered loans to these countries at a very low

interest rate. The offer was accepted and loan was approved. The contract was

made on variable interest rate.

 The actual crisis started when these countries had to pay back their loans. In

eight years (1970-1978) the amount of debt had risen to 159 billion dollar from

29 billion dollar. The signs of imminent crisis were becoming more and more

visible. The indebted countries were facing great difficulty in repaying their

loans as well as interest on this loan. The interest rate raised in U.S which

causes more difficulty for indebted countries of Latin America to continue their

debt- service because the amount of interest was much more than the GDP of 

the country.

 To overcome the situation, commercial banks further increase their lending to

developing countries. From 1979 to 1982 the amount of debt became doubled

from 159 billion dollar to 327 billion dollar. In 1982, the oil price again

skyrocketed and again went the world economy into recession. U.S tightened

their monetary policy which also drove up the interest rate. This situationcreated more difficulty for Latin American countries to continue their debt

service. These countries became current account deficit due to increase in cash

outflow (external debt) and decrease in the cash inflow (export).

 The economic environment of Latin America changed in these years. Many 

structural adjustments were made in the policies that causes restricting of 

production as well as employment. These policies reduce the protection of 

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LATIN AMERICA DEBT CRISIS 

import substitution industries and also reduce the employment of public sector

which greatly increased the reliance of people on import goods and

international market.

 The economic crisis also increased the poverty rate throughout the LatinAmerica. The per capita incomes also fall. In Latin America, several social

programs were designed to control the prices on food, housing, utility, and

other goods and services to lessen the poverty. But it did not work. The

restructuring policy also had an impact on the educational sector of Latin

America. Government made several adjustments to reduce the expenditures of 

education.

FACTORS THAT AGGRAVATE THE EFFECTS OF CRISIS:

In the previous sections, I highlighted how the crisis began and what happenedin the Latin America at that time. Now I would like to through some light on

the factors that cause the country to become more and more indebted and also

the areas where this external debt were utilized.

Many authors have categorized these factors as internal and external.

INTERNAL factors that I would like to discuss are investment in projects whose

returns were expected in future, Capital flight, flaws in development strategies

and policies and borrowing for current consumptions.