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Published on April 11, 2008

Author: Natalia

Source: authorstream.com

The Debt Crisis of The 1980’s In Latin America That Impacted Argentina and Brazil:  The Debt Crisis of The 1980’s In Latin America That Impacted Argentina and Brazil By Marc Felber What led to the debt crisis of the 1980’s in Argentina?:  What led to the debt crisis of the 1980’s in Argentina? Corruption and politically unstable country ruled by a military regime leftover from the 1970’s that retarded growth and investment. Heavy regulated economy and government support for inefficient businesses with subsidies. Overvalued Argentine peso and out of control government budget. Slide3:  What were the economic impacts caused by the debt crisis during the 1980’s in Argentina? Hyperinflation reaching recorded high of 4900% in 1989 from excess money supply to finance an inefficient government (Graph 1 ). The Argentine Peso depreciated by 70% during the decade because of the dollar’s appreciation in the foreign exchange markets. Financial instability of the Argentine peso in the 1980’s because of extensive dollar denominated debts and rise in interest rates. The impact of Inflation in Argentina:  The impact of Inflation in Argentina Slide5:  Rapid rising unemployment during the late 1980’s. Slow and erratic growth with negative gross domestic product GDP during the mid 1980’s (Graph 2). Argentina became a debtor nation during most of the decade because of a negative current account balance. What were the economic impacts caused by the debt crisis during the 1980’s in Argentina? (Cont) Slide6:  Economic Growth in Argentina Slide7:  How did Argentina solve the Debt crisis of the 1980’s? Economic reforms during the 1980’s and 1990’s including the Convertibility Law that required that each peso be backed with 1 US dollar, and fixing the exchange rate at 1 peso per US dollar. This was necessary to stabilize the export and import sectors and a prevent a further depreciating Argentine peso. However, this led to hyperinflation of 4900% in 1989 and high unemployment rates of 17.5% in 1995. Slide8:  Reduced production in the public sector by Privatizing state owned business and reducing or eliminating government subsidies. In 1991 Argentina reduced barriers to trade and implemented tax reforms. Things stared to improve for Argentina which witnessed growth of its gross domestic product GDP during the early 1990’s and inflation declining to 1.6% by early 1995. However, foreign debt remained a problem which Argentina’s Current account deficit increased to -$8,370 million by 1992. How did Argentina solve the Debt crisis of the 1980’s? (Cont) What led to the debt crisis of the 1980’s in Brazil?:  What led to the debt crisis of the 1980’s in Brazil? Oil shocks of the 1970’s doubled the price of imported oil into Brazil. Political red tape preventing reforms to bring inflation under control. Uncertainties regarding the future of the economy increased world interest rates raising as high as 14.08% by 1981. Slide10:  Excessive and unnecessary borrowing to maintain a high growth strategy by state enterprises. Overvalued Brazilian currency led to reduced exports raising to $1,847.12 U.S. by 1985 in real terms. Bankruptcy laws preventing state enterprises from going bankrupt which transferred the burden of debt to the government. What led to the debt crisis of the 1980’s in Brazil? (Cont) What were the economic impacts caused by the debt crisis during the 1980’s in Brazil?:  What were the economic impacts caused by the debt crisis during the 1980’s in Brazil? Increase in public debt and high interest rates led to major economic problems for Brazil such as a bankrupt public sector with accelerating inflation of 1800% by the end of the 1980’s. negative Gross domestic product GDP growth (Graph 1). Unemployment increased more than 6% during Brazil’s 1981-1983 deep recession before moving the economy back to full employment at 3.6% by 1986. Slide12:  Economic Growth in Brazil Slide13:  Appreciation of the Brazilian currency raising an average of $1,500 during the beginning of the 1980’s against the US dollar that led to a recorded surplus with their trading partners. Reduction in inflow of direct foreign investment led to negative foreign savings as Brazil became a debtor nation with its current account raising to 16.3 billion. (Graph 2). What were the economic impacts caused by the debt crisis during the 1980’s in Brazil? (Cont) Slide14:  Brazil’s Negative Current Account Balance During the 1980’s How did Brazil solve the Debt crisis of the 1980’s?:  How did Brazil solve the Debt crisis of the 1980’s? Economic reforms were introduced in the 1980’s and 1990’s that included price freezes, readjustments and freezes on wages, rents and mortgages, bans on indexation, and a fixing the exchange rate to 1 real per US dollar. The plan’s objective was to eliminate inflation. Other reforms included removing restrictions on free enterprise, foreign trade, increasing competition, privatizing public enterprises, and improving efficiency of goods and services by state-owned enterprises. Slide16:  How did Brazil solve the Debt crisis of the 1980’s? (Cont) Enacted reforms required by the International Monetary Fund (IMF) agreements included: Tax and Pension reforms, changes working laws, Bankruptcy law, and Independence of the Central Bank. However, few of these programs succeeded in Brazil because of its political instability and corruption. This Led to two decades of low economic growth and increases of social problems. Economic growth was low because of very high government deficits leading to inflation and the devaluation of the real during the 1980’s and 1990’s.

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