Chapter 13The Balance of Payments AccountTable 13.1 A Schematic Balance of Payments AccountSlide 4Table 13.2 Credits and Debits in the Balance of Payments AccountSlide 6Table 13.3 A Hypothetical Balance of Payments Table for a Developing NationTable 13.4 Before and After the Debt CrisisSlide 9Financing and Reducing Payments DeficitsSlide 11Table 13.5 Summary of LDC Payments Balances on Current Account, 1980–2006 (billions of dollars)The Debt Crisis of the 1980sSlide 14Slide 15Figure 13.1 The Mechanics of Petrodollar RecyclingSlide 17Slide 18Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization Policies, and Their CriticsSlide 20Slide 21“Odious Debt” and its PreventionResolution and Continued VulnerabilitiesTable 13.6 Dimensions of the LDC Debt Burden, 1970–2007Figure 13.2 Current Account BalancesCase Study: South KoreaConcepts for ReviewConcepts for Review (cont’d)Copyright © 2009 Pearson Addison-Wesley. All rights reserved.Chapter 13Balance of Payments, Developing-Country Debt, and the Macroeconomic Stabilization ControversyCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-2The Balance of Payments Account•General considerations:–Balance of Payments (BOP)–Current Account–Surplus and Deficit–Capital AccountCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-3Table 13.1 A Schematic Balance of Payments AccountCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-4The Balance of Payments Account•General considerations (cont’d)–Cash Account or International Reserve Account–Three forms:•Hard currency•Gold•Deposits with IMFCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-5Table 13.2 Credits and Debits in the Balance of Payments AccountCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-6The Balance of Payments Account•A hypothetical illustration: deficits and debts–Current Account–Capital AccountCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-7Table 13.3 A Hypothetical Balance of Payments Table for a Developing NationCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-8Table 13.4 Before and After the Debt CrisisCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-9The Balance of Payments Account–A hypothetical illustration: deficits and debts (cont’d)•Inflow•Outflow•AmortizationCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-10Financing and Reducing Payments Deficits•Some initial policy issues–International reserves–Restrictive fiscal and monetary policies:•Structural adjustment•Stabilization policies–Special drawing rights (SDRs)Copyright © 2009 Pearson Addison-Wesley. All rights reserved.13-11Financing and Reducing Payments Deficits•Trends in LDC Balance of PaymentsCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-12Table 13.5 Summary of LDC Payments Balances on Current Account, 1980–2006 (billions of dollars)Copyright © 2009 Pearson Addison-Wesley. All rights reserved.13-13The Debt Crisis of the 1980s•Background and analysis–External debt–Debt service–Basic transferCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-14The Debt Crisis of the 1980sdDFNDrdrDdDBT )( Net capital inflow, FN, isWhere d is percent increase in total debtD is total debtr is the average interest rateBasic transfer, BT, is(13.1)(13.2)Copyright © 2009 Pearson Addison-Wesley. All rights reserved.13-15The Debt Crisis of the 1980s•Origins of the Debt Crisis–OPEC oil price increase–Increased borrowing–Excess of imports–Lagging exportsCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-16Figure 13.1 The Mechanics of Petrodollar RecyclingCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-17The Debt Crisis of the 1980s•Origins of the Debt Crisis (cont’d)–Debt-servicing obligations–Debt-service payments–Debt-servicing difficulty–Oil shocksCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-18The Debt Crisis of the 1980s•Origins of the Debt Crisis (cont’d)–Developing countries’ two options:•Curtail imports and restrictive fiscal and monetary measures•More external borrowingCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-19Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization Policies, and Their Critics•The IMF stabilization program –Macroeconomic instability–Stabilization policies–Four basic components of IMF stabilization program:•Liberalization of foreign exchange and imports control•Devaluation of the official exchange rate•Stringent domestic anti-inflation program•Opening up of the economy to international commerceCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-20Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization Policies, and Their Critics•The IMF stabilization program (cont’d)–Such policies can be politically unpopular because they hurt the lower- and middle-income groups.– Less radical observers view the IMF as neither a developmental nor an antidevelopmental institution.Copyright © 2009 Pearson Addison-Wesley. All rights reserved.13-21Attempts at Alleviation: Macroeconomic Instability, IMF Stabilization Policies, and Their Critics•The IMF stabilization program (cont’d)–Tactics for debt relief:•Debtors’ cartel•Restructuring•Brady Plan•Debt for equity swaps•Debt for nature swaps •Debt repudiationCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-22“Odious Debt” and its Prevention•What is odious debt?–Sovereign debt used by an undemocratic government in a manner contrary to the interests of its people should be deemed invalidCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-23Resolution and Continued Vulnerabilities•Highly indebted poor countries (HIPCs)•Some progress but vulnerabilities remainCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-24Table 13.6 Dimensions of the LDC Debt Burden, 1970–2007Copyright © 2009 Pearson Addison-Wesley. All rights reserved.13-25Figure 13.2 Current Account BalancesCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-26Case Study: South KoreaCopyright © 2009 Pearson Addison-Wesley. All rights reserved.13-27Concepts for Review•Amortization•Balance of payments•Basic transfer•Brady plan•Capital account•Capital flight•Cash account•Conditionality•Current