Economic Development of Latin America Midterm 1

Bottleneck Industries

A concept coined by Albert Hirschman, who characterized the development process as a bottle with a thin neck. The bottleneck is a point of congestion in a production system that occurs when workloads arrive too quickly for the production process to handle. The inefficiencies brought about by the bottleneck often create delays and higher production costs. A bottleneck has a significant impact on the flow of manufacturing costs, and the bottleneck can sharply increase the time and expense of production. Industries are more at risk for bottlenecks if they are new in the production process for a new product, because there may be flaws in the production process that must be identified and corrected, and this situation requires more production time. Hirschman, therefore, advocated for the state targeting industries with the largest backward and forward linkages, as they could act as an engine of development. During Latin America's experimentation with ISI, countries often decided to invest on prestigious industries, rather than on those that would guarantee the country greater economic growth. An example of a bottleneck industry is Chile's automobile industry in Arica. Due to various issues, the industry did not lead to massive economic growth like the government had hoped. Some of these issues that impeded development include Chile's system of foreign exchange rationing through the Central bank, inflation, a lack of expertise in making automobiles, and the industry's location in Arica, which resulted in communications problems and high costs in transportation. Like Chile, many other countries in Latin America invested in industries that required a lot of capital and expertise that ended up being severely inefficient resulting in poor quality goods at high prices.

Trade Barriers

A government-imposed restraint on the flow of international goods and services. Among the most common barriers are tariffs, which are taxes on imports. Tariffs make imports more expensive for consumers and therefore protects the local industry When Latin America tried to industrialize in the 1900s and decided to develop its own industrial sector, it engaged in a period of import-substituting industrialization. During this period, governments in Latin America imposed tariffs on imports so that consumers had incentive to buy domestic products instead of foreign ones. These protectionist trade barriers limited trade exposure for these countries and isolated them from the world market. However, as Latin American countries realized the value in exporting agriculture, they lowered these trade barriers and began to gain global market share

Infant Industries

An emerging domestic industry that has not achieved economies of scale and experiences relative difficulty or is absolutely incapable of competing with established competitors from abroad. Governments often attempt to shield their infant industries from foreign competition through "short term" protectionist fiscal policies, such as import duties, tariffs, quotas and exchange rate controls, during their early stages of development. The argument in support of such protectionism is that because these infant industries lack the economies of scale, which their more established competitors have, they need protection in order to reach a more mature and financially stable level. In theory, once the infant industry is stabilized, these protectionist crutches should be removed, but in practice, it often occurs that the industrialist receiving the benefits have a vested interest in their indefinite continuation. The infant industry argument provided much of the rationale behind the ISI policies implemented in Latin America from the 1950s into the 1980s. In practice, trade restrictions only encouraged the wasteful and irresponsible expenditure of resources by those infant industries which were being protected. Generally, this lead to the production of inferior and more expensive goods as the only option for national consumers because producers had a captive market and thus, had no incentive to improve.

Urban Bias

Argument by which economic development is hindered by urban interest groups who are able to put pressure on governments to protect their interests In Latin America, many governments were experiencing an urban bias since they began to greatly favor the interests of the urban areas and rarely helped the rural, agricultural areas. The problem was that many of these nations had comparative advantage in the production and export of agricultural products and the governments were ignoring this fact, which stagnated growth in Latin American countries. In their urge to industrialize, the rural areas in Latin American countries were forgotten and the profitable agricultural exports were greatly reduced.

State scope vs. Strength

As Francis Fukuyama defines it in The Imperative of Statebuilding, state scope refers to a state's range of functions, from domestic and foreign security, the rule of law and other public goods, to regulation and social safety nets, to ambitious functions such as industrial policy or running parastatals. State strength refers to the effectiveness with which countries can implement a given policy. States can be extensive in scope and yet damagingly weak, as when state-owned firms are run corruptly or for political patronage. This is important because the two terms are not interchangeable and are often implemented poorly by developing countries. Developing countries have a tendency to be very weak in regards to state strength but excessive state scope, a combination that leads to inefficiency in areas that are important and efficiency in areas that perhaps are not. For example, a state in this situation can be very good a jailing news reporters but bad a processing visas. The ideal combination would be a state relatively modest in scope, but strong in ability to carry out basic state functions such as the maintenance of law and the protection of property.

Augusto Pinochet

Augusto Pinochet is the former president of Chile, who achieved power through a military coup d'etat in the 1973 against Marxist leaning president, Salvador Allende. Pinochet came into power at a time when Chilean society was deeply polarized and suffering from high inflation. At the beginning of his regime, Pinochet wanted the state to maintain control over the economy but eventually allowed the Chicago Boys to implement neoliberal reforms to transform the economy. Augusto Pinochet's economic policies allowed for a more sustainable economic reform and many argue that an authoritarian government is the best type of government to implement such economic reform. This is called the Chilean model where it is argued that the best and most decisive economic reform strategy is economic liberalization prior to political liberalization. Although his neoliberal reforms transformed Chile into the fastest growing economy in Latin America, it came at a high human cost as explained in the documentary "Commanding Heights." As a result of his policies, inequality and unemployment rose in Chile. In Latin America, he is remembered as a draconian dictator who "disappeared" thousands of people, ingraining the idea in Latin America that oppressive regimes and economic reform were intertwined.

Fernando Henrique Cardoso

Cardoso was the 34th President of Brazil. However, he is also very well known for his work with dependency theory. Dependency theory holds that underdevelopment in Latin America is due to their economic dependency to the rest of the world. Dependency theory draws on Marxist insight and inspires ISI later. In his book Dependency and Development in Latin America he addresses economic development policy and the need for strengthening and modernizing the state. His idea of development focused around the nation-state and strengthening domestic markets. He is important because his work on dependency is the base of ISI. His writing encourages state-led policy and "the absorption of technology to diversify the structure of output and to increase productivity." Dependency theory lead to ISI which then greatly affected the region and put it on the path it is on today.

Aristocracy of workers

Divides the labour force into two strata: those that benefit most from trade and manufacturing and those who receive little or no improvement. The title of aristocracy belongs to the former one, they can be found in the core of a core-periphery relationship. This is applicable to the idea that while industrialization helps improve standards of living, etc. the poor can still become poorer. (related to urban bias)

Economic dualism

Economic dualism is the existence of two separate economic sectors within one country. These sectors are divided by different levels of technology, development, and demands Economic dualism is very common in developing nations, where one sector is focused on the domestic market and the other is focused on the global market. In Latin America, economic dualism existed in the sense that the rural areas focused on the domestic market and were relatively behind in technological matters. Meanwhile, the growing urban class was focusing more on the export market and the merchant class began to see greater opportunities in the global market.

economic nationalism

Economic nationalism refers to an ideology which favors policies that emphasize domestic control of the economy, labor, and capital formation, even if this requires the imposition of tariffs and other restrictions on the movement of labor, goods and capital and restrictions on investment from other countries. In part, this ideology stems from not just by a country's desire to protect its economy but also from a resentment against foreigners meddling in the economy- namely the United States, which owned large shares of Latin American industries. Economic Nationalism was important in the institution of ISI, and then continued to be important to the Latin American economies as they wanted to promote their domestic industries and exclude foreign consumer products. Additionally, this ideology was used to support the enactment of protectionist policies against imports and the nationalization of key industries. In some countries, like in Mexico, these kinds of policies were extremely popular, as demonstrated by Lazaro Cardenas' nationalization of Pemex in 1938, which still ranks as one of Mexico's most popular decisions. However, in "What Washington means by Policy Reform," Williamson argues that Washington considers economic nationalism unwise because it restricts FDI which as a result, prevents the transfer of capital, skills, and know-how into the county. Instead, what Washington recommends is privatization and the liberalization of financial flows, which became pillars of the "Washington Consensus."

Gonzalo "Goni" Sanchez de Lozada

Goni Sanchez de Lozada was the former Planning Minister and President of Bolivia mentioned in "Commanding Heights." He is best known for his work with economist Jeffrey Sachs and for his implementation of "shock therapy" which entailed balancing the government's budget, reducing government spending, slashing protectionist policies, and preventing the government from borrowing from the central bank. De Lozada was crucial in addressing Bolivia's hyperinflation, which had reached 60,000%. During Bolivia's inflation crisis, the country stood alone and received little assistance from the international community, making De Lozada Bolivia's only hope for shifting the country's economy. As Planning Minister, De Lozada was able to reduce price controls and government intervention in the county over a short period of time to liberalize the economy. In Latin America, Bolivia's recovery served as an inspiration because it was done under a democratic government, dismantling the association between dictatorships and economic reform that was forged as result Chile's economic take off under Pinochet's regime.

Heterodox v. orthodox policies

Heterodox: "New" ways to deal with the debt crisis. Examples are inflationary inertia: anticipating inflation, price controls: setting a price for a good regardless of market behaviour. Orthodox: generally suggested/recommended by the World Bank/IMF; the Washington Consensus falls under this category. Cut spending, devaluation, trade liberalization, privatization, deregulation, property rights. A mix of these two types of reforms were implemented to help countries emerge from the debt crisis. However, heterodox economic reforms proved to be unsuccessful because producers were limited by price controls (ex. Argentina under Austral, Brazil with Cruzado Plan and Peru with ARPA)

IMF/World Bank conditionalities

IMF and WB conditionality refers to the struct prerequisites necessary for these organizations to disburse funds in the region. These are characterized by strict fiscal and economic reforms such as the decrease in fiscal spending which often times meant privatization. The main purpose behind this conditionality was to signal to the international financial sector that spending habits were changing and that further lending was possible. However, IMF and WB loans were used to service past debts (usually at a higher interest rate). If the government successfully implemented these tough reforms, many experts believed that economic growth would result from these conditionalities, therefore these countries will be able to cover future payments. IMF and WB conditionalities are important in understanding the types of economic reforms that Latin American countries were forced to implement. Those criticizing these conditions claim that these policies didn't consider specific characteristics for each country. Instead, they were forced onto these countries in a universal matter and worsened social conditions, especially for the already disadvantaged communities.

Mexican Default

In 1982, Mexico defaulted on its sovereign debt of 80 billion to the US as a result of increasing interest rates caused by the 1979 oil crisis that was triggered by the Iranian civil war. Though the increase in the price of oil from $35 per barrel to as much as $82 per barrel was favorable to Mexico as an oil exporter, the worldwide recession negatively affected the country due to decreased demand for oil. The increase in the Federal Reserve's interest rates to curb the oil based inflation made servicing this debt even more difficult. Compounding this, as about three-quarters of interest payments were tied to variable interest rates, debt service payments increased and made it difficult for countries to meet their payments. The Mexican default had long ranging consequences in Latin America is considered the beginning of the 1980s debt crisis. Once the Mexican Finance Minister announced to the U.S. that it could not pay its debt, there was a huge wave of divestment in Latin America because banks believed that if Mexico, a country that was self-sufficient in oil, could not pay its debt, then neither could other Latin American countries. Such divestment in the region had not happened since the Great Depression and banks were unwilling to lend money to the countries, further harming the region. As a result, Latin American countries could not pay the interest of their debts, could not borrow money, and were combatting high levels of inflation, marking the 80s as Latin America's "Lost Decade."

NFPA

Income paid to domestic factors of production by the rest of the world less income paid to foreign factors of production by the domestic economy. Factors include interest paid on investments, gains/losses of MNCs, foreign debt, interest on debt, and remittances. After the debt crisis when Latin American countries implemented maxi-devaluation which led to exporting more than they were importing, but they were still running deficits on the current accounts. This was because NFPA was negative: they had high foreign debt and had to pay interest on this debt.

Industrial Policy

Industrial policy is when governments implement policy that will favour a specific industry or firm regardless of whether this industry would have succeeded without their intervention. In other words, governments pick winner and losers and create policy to either benefit or hurt them with no regards to market forces. Adoption of industrial policy makes it hard for industries that are not chosen (not the beneficiaries) to access credit. Moreover, those that are targeted by the policies are protected and given more of an opportunity to grow than others. In many cases corruption plays a role in determining who or what industries benefit from the policies. An example of industrial policy is ISI in some cases seeing as the government based barriers to trade on the industry they wanted to promote regardless of whether it was a natural winner or loser.

Basic industries

Industrial sector which exports all or nearly all of its production (ex: agricultural industry, extractive industries, etc.). Basic industries, as a result of their foreign exchange earnings, create new incomes and additional spending power in their country's economy. This is important because any drastic or inordinate change in a basic industry's output or earnings will produce correspondingly widespread and deep effect on the entire local economy. In contrast, changes in the non-basic or support industries will only require a readjustment of incomes and spendings patterns, and the country's overall economic condition will remain largely unaffected.

Late v. Late late Industrializers

Late industrializers were those in particularly in Europe that industrialized after the initial wave of industrialization, they include Germany, Italy and Russia. These countries were prone to developing their industries sporadically yet quickly and this likelihood increased the more backwards the country is. This also led to proneness towards a focus on size in both plant and enterprise, focus on producer goods over consumer goods, pressure to levels of consumption, greater part played by special institutional factors and the smaller role played by agriculture. Late late industrializers only applied the last of these (level of the role played by agriculture) and during ISI had an important role for special institutional factors. In many Latin American countries the industrialization process was initiated by minorities or foreigners. Late industrializers developed their industries quickly and relatively continuously, their focus on producer goods, rather than consumer goods allowed their industries to flourish and become competitive in the world market. Late late industrializers expected the same type of fast-paced and continuous growth but their policies and disregard for agricultural products did not allow for the same results. Late industrializers fostered agricultural or pre-existing industries and used profits to invest in industrial development. Late late industrializers focused most, if not all, of their efforts on industrializing often times being ineffective and encountering stages of stagnation specifically when it came to ISI. The role minorities and foreigners play in this, is that they had little influence over policy.

Capital accounts

One of the two parts of the balance of payment. The capital account which refers to net capital inflow (net change in ownership of national assets). The capital account is FDI + Portfolio investments (purchases of shares and bonds) + Other investment (foreign aid) + Reserve account (international reserves held by central bank) A surplus in the capital account means money is flowing into the country, but unlike a surplus in the current account, the inbound flows effectively represent borrowings or sales of assets rather than payment for work. A deficit in the capital account means money is flowing out of the country, and it suggests the nation is increasing its ownership of foreign assets. The capital account is important because it keeps track of the big money in the external account such as FDI, foreign aid, and portfolio investment. The external account accounts for the flow of good between one country with the rest of the world.

Petrodollars

Petrodollars is money earned through the sell of petroleum. The term "petrodollars" was coined when the price of oil rose sharply in the 1970s and was used in reference to money that Middle Eastern countries and members of OPEC accumulated. In the 1970s and 1980s, the excess petrodollars were deposited in banks in America and Europe. These banks then lent the money to oil-importing countries which were predominantly developing countries, like those in Latin America. The ample supply of global cash during the 1970s motivated lending on a broad scale. Unless banks lent these petrodollar deposits, they would be unable to pay interest to the OPEC creditor nations. Lenders saw it as easier and more lucrative to advance megaloans to state-owned enterprises, backed by sovereign governments, than to package small business of agricultural loans in the US. In response to all this available cash, Latin American countries took out massive loans at flexible rates. By 1979, interest rates reached 21%, making it difficult for countries to pay off interests and forcing them to take involuntary loans to cover the remainder of their payments. All together, petrodollars hastened the debt crisis in Latin America as they contributed to inflation and overvalued currency. Eventually, countries such as Mexico, which had loans that were collateralized by the new oil discoveries, were unable to meet their financial obligations and had to default, triggering the 1980s debt crisis.

Price controls

Price controls are government restrictions on the maximum amount which may be charged for a good or service within a country. Price control policies are an attempt to maintain the affordability of products, prevent price gouging during shortages, and/or to slow inflation. Economists generally agree that price controls prevent the prices of goods from achieving equilibrium, and prevents prices from reflecting the actual value of a good or service. Those businesses which fail to abide by these "fair prices" are penalized through fines or temporary shutdowns. In Latin America, price controls were implemented in the form of price ceilings as a means of stopping the rapid onset of inflation. Ironically, price controls tend to cause shortages of the very basic staple good they are meant to keep affordable and thus increase inflation artificially. This also affects the retailers, because they are unable to run profitable businesses.

Qualitative v. quantitative import restrictions

Qualitative restrictions choose certain types of goods/industries to institute tariffs on imports, raising their respective prices relative to similar domestic areas. Quantitative restrictions limit the actual number (or ban completely) of these goods without affecting the direct price, only quantity. Both of these measures were used in ISI industrialization policies and are considered protectionist policies. Most notably, theorists used these restrictions to reduce dependence on foreign trade and modernize domestically. However, critics of these policies in Latin America argued that they were more about national pride and forced economic modernization rather than raising per capita income.

Raúl Prebish

Raúl Prebisch was an Argentine economist in the mid twentieth century. He is best known for being one of the co-founders of Dependency Theory, which claims that Latin America was an economically underdeveloped region because of its position in the world economy. He came to this conclusion by analyzing terms of trade in the region and realizing that they were deteriorating for these countries, meaning that the high prices of their imports (manufactured goods) couldn't match the low prices of their exports (raw materials). Prebisch is important because he was the first to introduce a policy document defending ISI as the recommended economic policy for the region. He also coined the popular terms "core" and "periphery" to argue that Latin America must resort to protectionist policies to attain self-sufficiency and end the exploitive economic relationship with countries in the core.

Seignorage

Seignorage is an increase in the money supply by simply printing more currency. This is one of the three main ways in which a government responds to overspending. This process causes inflation, which benefits the government because they are able to pay off their debt with currency that is worth less, but it can eventually lead to an inflationary crisis. Siegnorage is important because it was practiced by many countries in Latin America during the 1970s and 80s. It played a role in the high inflation that characterized many of these countries including Bolivia, which used this method to finance their government deficit and reached the seventh highest inflation rate in history.

debt trap

Situation in which a certain debt is difficult or impossible to repay. This may occur due to high interest payments preventing the repayment of the principal Several Latin American countries entered a debt trap in the debt crisis of the 1980s since they saw themselves unable to repay their debt. The nations had accumulated vast amounts of debt due to the high oil prices and the liquidity of the market. However, this overborrowing eventually backfired. Many countries tried to restructure their debt but not even this was helpful

Rent-seeking

Term used when the resources of a company or an organization are used to obtain economic profit from others without giving back any benefits to society Economic development was stagnated in Latin America due to many enterprises and even governments adopting rent-seeking behavior. Governments sought to enrich themselves and capture as much profit as possible without generating wealth for the country. In addition, they did not reinvest the profits they earned, but rather kept them for personal gain. Moreover, the industries in Latin America did not provide workers with the most adequate working conditions, but rather tried to minimize costs by whatever means necessary and capture as much profit as possible. Rent-seeking behavior caused inequality to increase within Latin American countries.

Chicago Boys

The Chicago Boys were a group of Chilean students from the Pontifical Catholic School who attended the University of Chicago's School of economics in the 1950s-60s, as mentioned in the documentary "Commanding Heights." At the University of Chicago, these students learned to embrace Milton Friedman's free-market philosophy and to distrust state economic planning and dependency theory. This took place during a time when Chile's military regime, under Augusto Pinochet, prefered to harness a controlled economy. In Chile, the Chicago boys figured prominently in in the 1970s-80s and became the principal advocates for orthodox economic policies, as they believed that the key to development was vested in minimal state interference in the economy. With Pinochet's blessing, the Chicago boys were able to transform Chile's economy through the implementation of neoliberal policies, such as the privatization of national industries and the abolishment of artificial price controls. They also advocated for a minimalist role for the state as a guarantor of rules and rights and a provider of limited public goods. Due to their advocacy for orthodox economic policies, they are credited for transforming Chile into Latin America's best performing economy. However, their policies resulted in greater economic inequality and a 30% unemployment rate in Chile. Moreover, this economic transformation was tainted by Pinochet's dictatorship, forging a connection between neoliberalism and an oppressive state and making other Latin American countries resistant to economic reform.

Great Depression

The Great Depression was a severe worldwide economic recession that took place mostly during the 1930s, originating in the United States. The timing of the Great Depression varied across nations. In most countries it started in 1929, after the stock market crash of October 1929, and lasted until 1941. The Great Depression had critical effects in the Latin America. First, it led to a sharp decrease in export earnings of foreign exchange, making it difficult for Latin American countries to import goods from abroad. Latin American countries depended greatly on the sell of exports but during the recession, international trade fell by ⅔ due to the implementation of protectionist policies by the U.S. and European countries. Second, it lead serious divestment in the region. Third, it reinforced the notion in Latin American countries that being integrated in the world market was detrimental, as it make them vulnerable to price variability. In turn, Latin America became weary of trade relations and decided to disintegrate from the world economy and to begin pursuing ISI to develop its own domestic market.

The Lost Decade

The Lost Decade refers to a period of negative/low economic growth in Latin America as a result of the debt crisis. During this period (1980s), Latin American governments reached a point where their foreign debt exceeded their earning power and most countries in the region where unable to repay their foreign debts. This prompted investors to withdraw their money and place it elsewhere, which just exasperated the degree of economic loss in Latin America. The lost Decade describes the dire economic situation of the region. Inflation, debt, and populations all grew, and many countries fell back into autocratic rule. Thus, much of the social and economic progress was erased during this time period. This was also the result of the world oil shocks experienced in the 1970s, which showed how dependent Latin America was on the world economy.

Current Account

The current account is the sum of the balance of trade (exports minus imports), net factor payments from abroad Positive current account balance means that the country is a net lender to the rest of the world and a negative current account balance means that the country is a net borrower from the rest of the world Current account surplus means that a country's net foreign assets have increased and a current account deficit represents a decrease (Exports- Imports) +/- NFPA (Net Factor Payments from Abroad) During the 1970s, the large oil shocks caused Latin American countries to enter into a period of current account deficits. On the other hand, the oil-producing countries were experiencing current account surpluses. Latin American countries began to borrow large amounts of money from US banks (financial intermediaries between the oil-exporting countries and the Latin American countries) This eventually led to huge amounts of debt being accumulated by Latin American countries and resulted in the debt crisis of the 1980s when the countries defaulted

Balance of Payments

The difference in total value between payments into and out of a country over a certain period of time Latin America experienced a balance of payments crisis during the debt crisis of the 1980s. Although Latin American countries experienced a period of very rapid growth when large capital inflows were coming into the countries, they soon saw themselves struggling to repay the debt and therefore pay for essential imports adequately. During this period, the capital inflows were much higher than their capital outflows, which caused the balance of payments to be negative

Nominal Exchange Rate

The nominal exchange rate is the price of a foreign currency in terms of the home currency. A decrease in the nominal exchange rate is a nominal appreciation of the currency (if purchasing power of a currency relative to foreign currency increases). An increase in the nominal exchange rate is a nominal depreciation of the currency (if purchasing power decreases). The nominal exchange rate is important because it reflects a country's purchasing power, which can help a country be competitive on the international market. Countries can fix the exchange rate as part of economic policy. For example, during ISI countries overvalued the exchange rate to help producers have more purchasing power but this backfired in the long run. Hence, it is important to be careful with manipulations of the nominal exchange rate.

Involuntary Loans

The process of rolling over the principal and interest payments due on a loan into new (and usually more expensive) loans. This allowed countries breathing room to meet their financial obligations and not default. The main idea consisted in letting these countries temporarily rollover parts of their debt and give them more mature deadlines, with the assumption that their economies would be better off by the time they needed to pay these new loans. Involuntary loans are important because Latin American countries resorted to this measure to avoid default in the early 1980s. However, the assumption that these economies would be more productive after some time of implementing the IMF's strict orthodox measures proved to be wrong in most cases. This assumption was not foolproof, and Latin America revealed this reality by 1985, when most countries had not met good-standing conditions and still couldn't repay their debt.

Dependency Theory

Theory which dictates that resources flow from poor and less developed nations (periphery) to the wealthier nations. This theory depicts that wealthier countries benefit at the expense of poor nations Throughout history, Latin American countries have been depicted as dependent of developed countries for their international trade and products. Since Latin America's industrial sector is not very advanced, it has always been the case that Latin America exports raw materials to developed countries and the developed countries use these materials to manufacture products, which they sell back to the developing nations. This creates a dependence between the Latin American nations to the developed nations for manufactured products and as their main source of trade income

Macroeconomic v. microeconomic disstortions

These both play a part in policies adopted to impulse industries in East Asia and Latin America. Macroeconomic distortions involve policies like inflated foreign exchange, running constant budget deficits and were adopted by Latin America. Microeconomic distortions include protectionism, industrial policy and were adopted by countries in both regions. This is discussed by Dani Rodrick. The difference between these two is a potential explanatory variable in the way economic (debt) crises hit each region. Microeconomic policies although they may hurt growth do not affect a nation's ability to pay debt. Macroeconomic policies on the other hand do and although they are meant to be adopted for short periods of time, Latin American governments adopted them for the long term, draining their foreign reserves and thus they were unable to pay their debt while the Asian Tigers were able to get back up faster.

Debt Rescheduling

This concept, discussed by Pereira, is what countries in Latin America had to recur to during the debt crisis as they were unable to meet the deadlines to their debts. Countries were given a new due date to pay their debts, often at a discounted rate. This was one of the solutions adopted after multiple countries defaulted on their debts or proved that they would be unable to pay in full.

Deterioration of terms of trade

This occurs when the value of a country's exports declines or stagnates (often caused by lower prices and no change in consumption), this can be accompanied by an increase in the price of imports. This, according to Engel's law, affects countries that produce and export primary goods. What this law says is that increased wealth is not matched by an increase in demand for primary goods. The effect of deteriorating terms of trade is that high rates of growth in the primary product sector is not enough to result in development. This led to pessimistic views when it came to exports and eventually more protectionist policies and an effort to substitute industries that were previously imported because Latin American countries had to export higher quantities to be able to import at the same level.

Oil Crises

Two oil crises, in 73 and 79, that had a tremendous impact on Latin America and the rest of the world. The first oil crisis took place in 1973, when OAPEC announced an oil embargo and the second occurred in 1979 during the Iranian civil war, which resulted in a decrease in oil supply. The two crises dramatically increased oil prices, affecting various industries and sectors throughout the world and prompted a rise in interest prices. These crises caused massive stagflation throughout Latin America. It also started to raise interest rates, and since the interest rates were not fixed on the debt they kept taking on, Latin American countries found themselves paying ever higher inflation rates. Eventually the inflation, coupled with the economic stagnation destroyed the Latin American economies, and eventually Mexico defaulted in 1982. This was the beginning of the end of ISI policies These crises had major impacts in the Latin American region. Since the crises resulted in an ample supply of global cash, banks began to issue loans. In Latin America, many countries took advantage in petrodollar deposits to take out huge loans at flexible interest rates. However, with increasing interest rates, Latin American countries found it difficult to pay off the interest from the loans they took out, prompting them to take out involuntary loans to meet their interest payments. Eventually the inflation, coupled with the economic stagnation destroyed the Latin American economies. Finally, in 1982, Mexico defaulted, marking the beginning of the Latin American debt crisis and the beginning of the end of ISI policies.