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Norton Media Library
Chapter 15
Foreign
Debt
Dwight H. Perkins
Steven Radelet
David L. Lindauer
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Following WWII, Mexico borrowed little from international banks
and foreign investors (shares in local firms) and official lenders (i.e
WB)
In late 1960s and 1970s the capital market instruments got more
sophisticated and costs fell.
Mexico and many other countries started to look for more financing
Mexico foreign borrowing has tremendous impact on its economic
growth, macroeconomic stability, job creation, and political
dynamics
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In 1970: Mexico foreign borrowing from private creditors was 1% of
GDP
1980: 8% of GDP.... more than half of the debt was “short term”:
had to be repaid within 1 year
At first, borrowing seemed to help: GDP per capita rose 2.4% 19721981
But it turned out that Mexico had borrowed “too much too quickly”
In 1982 Mexico announced it could not service its debts
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Investment fell, negative growth rates....
Mexican crises cascaded out to many other heavily-borroweddeveloping countries
Some countries are still affected!
By 2003, developing countries as a whole were repaying more to
official creditors than they were borrowing!
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Since the 1980 several countries in the region have experienced a
surge in economic development and have initiated debt
management programs in addition to debt relief and debt
rescheduling programs agreed to by their international creditors.
The following is a list of external debt for Latin America
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Country
External Debt
Year
Mexico
274.800
2011
Cuba
13.100
2005
Bolivia
6.430
2005
Honduras
4.675
2005
Costa Rica
3.633
2005
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ADVANTAGES AND DISADVANTAGES OF
FOREIGN BORROWING
Prudent borrowing has been an important part of the development
strategy for some developing countries
Most countries in Western Europe (And USA in 19th century) relied on
foreign borrowing to finance its development strategy.
Borrowing permits a country to invest more than it can save and import
more than it can export
If the additional funds finance productive investment sufficient returns
recall that low-income countries have the potential to realize higher rate
of return!
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Therefore, foreign borrowing can help support growth and
development and yield attractive returns to lenders
Some countries prefer foreign borrowing over FDI..... can you
explain?
Think: Tax holiday, ownership, fast and ease....
Yet debts must be paid
Borrowing to finance consumption or bad investment!
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Debt sustainability
How much aggregate debt can a country take before it begins to get
into trouble?
As long as the country’s loan can be serviced, the loan is sustainable
Different factors determine country’s ability to repay debt:
Debt size, trade and budget deficit, interest rate on debt, loan mix,
GDP growth rate, economic factors, exports, government revenues
Debt service: the amount due for principle and interest payments in
a given year
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Country’s Capacity to Pay
•
3 measures:
•
GDP, exports, and government tax revenues
•
•
The larger a country’s productive capacity and corresponding
income, the greater its ability to repay debt
For foreign debt, the country’s ability to earn the dollars (or other
currencies) needed to repay the debt dominated to foreign currency
is important
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Escape from the crises, for
some countries
•
Refinancing: making new loans to repay the old
•
Rescheduling: to allow longer repayment and possibly low interest
•
Reduction
•
Buyback: the debtor buys the loan from the creditor
•
Debt-equity swaps: creditors are given equity in a company in
return for eliminating the debt outstanding
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Conclusion
•
Advantages and disadvantages of foreign debt
•
“loans solve liquidity problems not economic crises”!
•
Utilization of foreign loans?
•
Absence of economic vision
•
Foreign loans and macroeconomic policy
•
Independence and freedom?
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This concludes the Norton Media Library
Slide Set for Chapter 15
Economics of
Development
SIXTH EDITION
By
Dwight H. Perkins
Steven Radelet
David L. Lindauer
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