IPE Final 2

According to the podcast, foreign capital lent a lot of money to Argentina in the years after Argentina pegged its currency to the dollar because

1. Argentina was perceived as a high-growth economy 2. Argentina's currency was now considered much safer

According to Oatley, each crisis in the decade of financial crises (in Asia, Latin America, Turkey, and Russia) was distinctive in some way, yet all shared important similarities:

1. Each country maintained some form of fixed exchange rate (including policies such as a crawling peg) 2. Each country developed a heavy reliance on short-term foreign capital

Asian banks who borrowed short-term loans from abroad to lend long-term loans in Asia faced two types of risk

1. Exchange rate risk, which arose from the possibility that the government would devalue the local currency 2. The risk of sudden stops: that foreign lenders would stop rolling over their short-term loans

Two differences between the HIPC debt initiative and previous programs include the following:

1. In a two-stage process, the debtor government must first work use a participatory process to design a plan, and must then satisfactorily implement the plan in order to complete the program 2. Debts owed to multilateral lenders were reduced/forgiven

The following major economic shocks hit Latin America in 1979 and the early 1980s:

1. Interest rates went up in the US, which translated into higher interest rates for Latin America debt with variable interest rates 2. Oil prices rose again, increasing the cost of imports 3. Recession in the advanced industrialized world reduced demand for Latin American goods and reduced their terms of trade

The following factors motivated indebted Latin American governments to reduce their role in their countries' domestic financial systems and to liberalize their capital accounts in the late 1980s and 1990s:

1. Key members of the ISI coalition lost the strength to oppose economic reform 2. Governments recognized that the outward-oriented policies of East Asian governments offered useful lessons for Latin American governments 3. The US and other bilateral and multilateral donors advanced funds to guarantee the principal of "Brady bonds," which were commercial bank debt converted into bonds with lower face value, thus enabling debtor governments to capture a larger share of the benefit of reform

According to the podcast, after Argentina defaulted on its debt,

1. Lenders sanctioned Argentina by refusing to lend to Argentina at levels anywhere close to the lending before the default 2. Lenders sued Argentina in court in New York and won but were not able to collect 3. Argentina's economy was able to recover to a large degree because its exports became cheaper in world markets

According to the Political Trilemma of the World Economy, if governments have the three following goals, they must choose two and sacrifice the third:

1. Nation State 2. Hyperglobalization 3. Democracy

Creditors initially diagnosed the debt crisis of the early 1980s as a

1. Short-term liquidity problem that could be solved with new loans in exchange for reduced budget deficits and exchange rate devaluation to improve the balance of trade

Which of the following were conditions of IMF assistance during the Asian financial crisis?

1. Structural reforms, such as deregulation and privatization of state-owned enterprises 2. Tightened fiscal policies to generate financial resources to rebuild the financial sector 3. Conditionality on macroeconomic stabilization, including tightened monetary policy to restore market confidence and stem capital outflow

The rise in private lending to developing countries in the 1970s was driven by

1. The 1973 oil shock, which generated large current account surpluses in oil-exporting countries that enabled those countries to lend petrodollars to commercial banks, who then lent to developing countries 2. Growing demand for foreign capital in developing countries pursuing ISI strategies

The rapid accumulation of debt in the 1970s contributed to

Economic growth in Latin America in the 1970s

What did Argentina's Convertibility Law do?

Fixed the Argentinian peso to the dollar

According to Oatley, developing countries draw heavily on foreign capital because

Foreign capital is a way for developing countries to overcome a shortage of domestic savings to increase investment and thereby raise per capita incomes

The massive accumulation of debt in Latin American countries in the 1970s made those countries vulnerable to international shocks because

ISI's focus on capital-intensive projects failed to generate exports, which led to high debt service to export revenue ratios

Between 1982 and 1986, net capital flows were transferred from the seventeen most heavily indebted countries to banks in advanced industrial countries because

Lenders acted as a united front because they solved the free-rider problem by the IMF refusing to advance credit to a government until commercial banks pledged new loans to the same government

The most generous bilateral foreign aid donors in the world are

The United States in terms of absolute dollars, and small Northern European countries in terms of aid as share of national income

Debtor governments never threatened collective default because

They were caught in a prisoners dilemma - collective default could yield collective benefits, but each government had an incentive to defect from collective default in order to seek a better bilateral deal

According to Oatley, moral hazard was an issue with the respect to the Asian crisis

When banks believed that the government will bail them out if they suffer large losses on the loans they have made

According to Rodrik, international institutions can enhance democracy by improving deliberation and ensuring minority representation, but can clash with democracy by accomodating commercial and financial interests by constraining the ability of national governments to pass certain laws.

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