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Session 5
Jeffrey Sachs, “External Debt and Macroeconomic Performance in Latin
America and East Asia,” Brookings Papers on Economic Activity, 2:1985,
pp. 523-64
I.
Article Overview – Why have EA countries outperformed LA countries?
A. East Asia: Maintained strong growth rates and low inflation, and only the Philippines
forced to reschedule debts
B. Latin America: National incomes grown slowly or declined, inflation has surged, and
debtors have had to reschedule debts
C. What traditionally examined possibilities account for each region’s record discussed
above?
1. External shocks – though the evidence is contradictory – it may have been
worse in EA
2. Overborrowing in LA – important but contradictory evidence – significant
borrowing occurred in EA too – the key is in the way in which it was managed
a. Examples: Korea and Thailand had larger current accounts deficits
than those in LA in 70’s
b. Korea’s debt-GDP ratio was higher than Brazil’s in 1981
3. Exchange rate management and trade regime – trade policies in EA, while
export-promoting, were not laissez faire
4. Lower tax rates in EA – taxes not significantly different as % of GDP
D. So what does Sachs see as the most important differences?
1. Trade regime
a. LA did not use foreign borrowing to develop export industries for debt
servicing – EA had much better debt-export ratios and debt service
to export ratios – exports grew much faster in EA
2. Exchange rate management
a. LA’s overvalued exchange rates encouraged capital flight
b. Related foreign borrowing financed private sector’s accumulation of
foreign assets, rather than increase export
E. What does Sachs see as the reason for these policies?
1. Politics paralyzed by historic protection of industry through ISI
II.
External Shocks – An Examination
A. LA’s extent of borrowing in variable interest rates is much higher than in EA, with
exception of Korea (a greater proportion of EA debt comes from nonbank entities,
such as export credit agencies); this greater exposure to the variable real interest
rates hurt LA more
B. However, LA’s sum of real interest rates and TOT effects remained relatively the
same as EA (see Table on page 330)
C. CONCLUSION: The need to reschedule is not closely tied to magnitude of external
shocks as proportion of GDP
III.
External Borrowing – An Examination
A. LA’s debt-export and debt service ratios are much higher than EA’s (well over 100%
in nearly every case – see Table on page 332)
B. Higher ratios due to concentration of debt in short-term maturities, a higher effective
interest rate on debt, and higher exposure than EA to variable interest rate credit
C. Result: LA could not service debt when lending stopped in 1982 – debt-servicing
ratios were > 100%; this led to debt rescheduling
D. CONCLUSION: As demonstrated in the summary, both EA and LA held significant
debt; external borrowing was less an important factor in explaining the differences
between EA and LA experiences than the way the debt was held and managed
IV.
Trade Policies and Exchange Rate Management – An Examination
A. EA’s rapid growth in exports relative to GDP since 1965, compared to LA (which was
mostly flat)
B. Large LA debtors (Argentina, Brazil, and Mexico) has significantly smaller export
base relative to GDP than EA by 1983 – traditional anti-export bias of protectionism
present
C. LA has allowed for black market exchange rates to develop, which have an antiexport bias; EA have ensured only small discrepancies in this area (see Table on
336)
D. EA has also decreased dependence on the dollar in exchange rate management by
maintaining the exchange rate relative to a “basket of currencies,” rather than the
bilateral dollar – no country in LA has adopted a basket and all continue to peg to the
dollar, which led to suffering when the dollar appreciated in 1980
E. CONCLUSION: The export-orientation for trade and currency-basket orientation for
exchange rates were major reasons for the discrepancy in development between LA
and EA; this is the most significant factor in explaining differences in economic
performance
V.
Fiscal Policies and the Role of State Enterprises – An Examination
A. Evidence shows that it is doubtful that LA countries have overtaxed their public
sectors – many LA countries, such as Argentina and Mexico have difficulty, raising
sufficient government revenue
B. Size of budget deficits is more likely a factor in LA problems than size of
governments
C. No strong evidence that state evidence that state enterprise plays a more important
role in LA than EA
D. Korea and Taiwan have higher share of national fixed capital formation through state
enterprise than LA countries except Mexico and Venezuela
E. CONCLUSION: No significant cause for difference
VI.
Final Notes and Considerations
A. LA has relied on policies that tax the agricultural sector because the sector is weak
and unorganized and political unrest in cities has traditionally been more dangerous
B. EA has taken the opposite path, avoiding overtaxation of the agricultural (ag) sector
C. Tariffs on ag goods reduce ag’s TOT and share of income originating in the export
sector
D. Ideology, foreign policy, and national security also figure into differences in policy
between EA and LA; urban bias is not only reason
E. Case study: Mexico’s problem rests with exports (pages 346-348)
F. CONCLUSION: LA needs to develop export base, but the tradition of
protectionism/ISI will be difficult to overcome