Ch. 4 Understanding Globalization
Debt crisis and Globalization
Neither a lender nor a Borrower be
 Debt crisis in early 1980s threatened rich and poor countries
different consequences for northern creditors and southern
debtors.
 Rising interest rates increased amount borrowers were
expected to pay northern lenders and falling commodity prices
for goods southern countries exported to North decreased
incomes in South, make it more difficult for them to repay
northern lenders.
 Increasing costs and falling incomes made it difficult for
borrowers to repay debts
 Between 1970 and 1973, banks in Western Europe and United
States lent $23.4 billion to Latin America, more money than
had been loaned previous 30 years (Schaeffer, 81).
The Lenders
 During 1970s governments and private investors deposited US
dollars and other hard currencies they earned in trade with United
States in Western European (WE) banks and in US banks with
subsidiaries in Europe (Schaeffer, 81). Why did investors pick WE
and U.S. to invest?
 Eurodollar banking pool grew from $10 billion in 1960 $210
billion in 1970. After the OPEC oil embargo raised oil prices,
OPEC countries deposited profits in Western European and US
banks (Schaeffer, 82). US banks became active in Latin America
1984 "in nine largest US banks loaned over $30 billion to private
and government borrowers in three countries: Mexico, Brazil, and
Argentina (Schaeffer, 82).
The Lenders
 Loaned so poor countries purchase goods made in Western
Europe and North America in 1970s: 42% of Britain's
construction equipment, 33% of new aircraft and 32% of
textile machinery went to third world markets; in US, by
1980 third world markets accounted for 20% of US
industrial product and one quarter gross farm income
(Schaeffer, 82).
 US bankers and 1970s did not worry about risks associated
with foreign loans: most money was loaned to Latin
American dictatorships and price of oil was rising in 1970s,
as incomes grew, borrower countries would repay old debts,
and countries do not go bankrupt.
The Lenders
 Northern banks worried about risks associated
with debts, however. Late 1970s borrower agreed
to readjust interest rates on new and old loans
every six months in line with current market
rates. By 1983, 70% of all loans in Latin America
were subject to floating interest rates, rising or
falling depending on interest rates set in the
United States (Schaeffer, 83).
The Borrowers
 Latin America borrowed $272 billion between 1976
and1981 60%, $170.5 billion was paid back to banks as
debt repayment or interest $23 billion remained with
[northern]banks as reserves and $56.6 billion sent
abroad as capital flight; of the $88 billion dollars
Mexicans borrowed between 1977 and1979, $14.3
billion was available for use in country; (Schaeffer, 84).
The Borrowers
 Rising oil prices and 1970s force countries without oil to
pay more for imported oil; oil price increases cost
southern countries an extra $260 billion between 1974
1982 (Schaeffer, 84). Imported food rose in 1970s.
Rising oil prices increased cost of growing food with
farmers relying heavily on gasoline – powered tractors
and petroleum – based fertilizers and pesticides;
 Poor harvests and Soviet union during mid-1970s
increased demand and price of food on world markets;
The Borrowers
 Military spending by Latin American countries
doubled during 1970s, despite facing no external
threats(Schaeffer 85). Failed development
projects and government corruption also increase
debts; private borrowers acquired a substantial
portion of Latin American debt. Private debt rose
from $15 billion in 1972 to $58 billion in 1981.
Non-Government Sources of Debt
 Private debt rose from $15 billion in 1972 to $58 billion in
1981
 Subsidiaries of businesses in Western Europe and North
America borrowed money; GM, Ford, PepsiCo, added $70
million to Mexico’s debt total;(Schaeffer, 85-86).
 Causes of increased private debt were high interest rates and
falling commodity prices
Rising Interest Rates and Falling Prices
 High-interest rates increased debt; Mexico’s interest went
from $2.3 billion in 1979 to $6.1 billion in 1982; For Latin
America in total: $14.4 billion in 1979 to $36.1 billion in
1982;
 Economist estimate that 1980s high-interest rates cost LA
countries $41 billion more than they would have paid if rates
remained at avg level between 1960 and 1980;
 High-interest rates attracted $150 billion in LA capital
between 1973 and 1987 (Schaeffer, 87).
Falling Prices
 Commodity price levels fell between 1950 and mid-1970s;
Between 1980 and 1982, world commodity prices fell by a
third;
 Falling prices reduced ability of borrowers to repay debs
being pushed up by higher interest rates;
 Commodity prices fell as southern countries produced mor
in the 1980s (Schaeffer, 88).
IMF and Structural Adjustment
Programs(SAPs)
 Capital flows to LA fell by one-third from 1980 and 1984 but
countries needed new loans;
 Purpose of SAPs was to create trade surpluses and
government surpluses to repay debts;
 LA governments devalued their currency to try and create
trade surpluses and become competitive;
 LA countries exported between $90 billion and $100 billion
worth of goods between 1980 and 1984; money used to
repay lenders (Schaeffer, 92).
IMF and Structural Adjustment
Programs(SAPs)
 Mexican govt. sold off 875 of 1,155 enterprises that it had
owned in 1982 (Schaeffer, 93);
 Mexican govt. sold Telefonos De Mexico for $1.76 billion to
a French, American, and Mexican communications
consortium;
 Benefits for the North—Lenders paid back by southern
borrowers; Increased flow of goods from South to North;
 Sales of industries in South; northern investors got great
bargains;