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Latin America Economic History Notes

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Latin America and history

Week 1

Services and goods

The higher the urbanization rate in a country, the higher percentage of services it provides in comparison with products/goods it provides.

Economically active population

People actively searching for work. Effectively it Is the labor factor looking for work. Higher the number generally, higher the quality/effectiveness of work in the country. Exception is Chile/Uruguay. -> Proabably because of level/quality of education.

Human development indicator

The Human Development Report Office releases five indices each year: the Human Development Index (HDI), the Inequality-Adjusted Human Development Index (IHDI), the Gender Development Index (GDI), the Gender Inequality Index (GII), and the Multidimensional Poverty Index (MPI).

Week 2

In Latin America : Macroeconomics of an open economy 

Expenditure approach

Calculating demand in an economy

  1. Aggregated demand = Consumption (C) + Investments (I) + Government spending (G) + Trade balance (export (E) – import (M) )

X → export of goods and services

M → import of goods and services

  1. Y = C + I + G + [ (X-M) + NY + NCT]

Current account (CA) = ( X-M) +NY +NT

NY: Net income from aboard

NCT: Net current transfers

New Equation

  1. Y = C + I + G + CA
  2. CA = Y - [ C + I + G ]

CA is the gap between disposable income (Y) and expenditure

CA<0⬄ Y<[C+I+G]

What kind of economic policy should u adopt production is lesser then expenditure in the country?

Change the composition of AG

  • Reduce expenditure (Govt spending)
  • Increase production
  • Kenyes : 2y/2t > [pic 1]

Y – [ C + G ]  = I + CA

S = I + CA

CA is the gap between savings and investments; if there is a deficit u can either increase savings or investments

Solution to current account deficit

Increase savings via interest rate or income

Increase investments

S – I = CA => ( S,public + S,govt) – (I,p +I,g) =CA

CA = (Sp –Ip) + (Sg-Ig)

  • CA < 0 public deficit

The current account also equals the country’s net lending to foreigners. Unlike a closed economy, an open economy can save by domestic and foreign investments. National saving therefore equals domestic investment plus the current account balance.  

Balance of payments

the difference in total value between payments into and out of a country over a period.

  1. Composition of Current account
  1. Trade balance (goods)
  2. Services balance
  1. When consumer pays for services outside of the country
  1. Income balance
  1. When taxes paid goes out of the country to the home country
  1. Net transfers
  1. Capital account (not used in this course)
  1. Non market transactions
  1. Financial account (The Capital flows registered in this account)
  1. Foreign direct investment deal with international company
  1. Company takes the decision to make a business in a new environment
  1. Portfolio/financial flows
  1. Capital inflow or flight
  1. Derivatives
  2. Other investments
  1. International monetary funds
  1. Error of omission (not use in this course)

CA + FA + BP

CA <0

What happen if current account is a deficit?

Since Brazil’s CA is dominated in $US.

  1. Increase financial accounts
  1. Increase interest rates – attractiveness
  1. Liquidate international reserves
  1. Will cause bleeding out of reserve
  2. Lenders to help bleeding, IMF

Balance of payments accounts provide a detailed picture of the composition and financing of the current account. All transactions between a country and the rest of the world are recorded in the country’s balance of payments accounts. The accounts are based on the convention that any transaction resulting in a payment to foreigners is entered as a debit while any transaction resulting in a receipt from foreigners is entered as a credit.  

Week 2: lesson 4

Latin American countries have been the recipients of a large portion of total international capital flows to developing countries, both in the late seventies to early eighties and in the early nineties. These inflows have financed persistent current account imbalances, as well as the accumulation of foreign exchange reserves

Learning goals

Debt crisis in the early 90’s

  • International capital flows in XXth Century
  • Apply concepts of CA of BP in the imbalances of the 70’s

International context

Time line

Incident

Remarks

Key events

1870-1914

The gold standard and stability

Usage of a currency backed by gold

Encourage of open economies

-Foreign trade

International division of labor

Who provides capital to LA to purchase these goods, considering selling coffee is hard to buy railroad stuff.

Argentina was rich, richer then Switzerland etc

  1. Developed economies {Sweden, French, USA, Brittan, Germany}
  1. Latin America to export commodities to developed economies
  1. DE export industrialized goods (steel, iron, ore, trains, “railroad things”)
  1. Developed nations(Germany) allocate resource to export goods to LA
  1. Private British capital finance these purchase and provide inflow of financial resources to Sao Paulo.
  1. These resources were following to the governments in LA not private sector. So governments were building up debts
  2. Look at the absence of money

Look at case study

1919 – 1939

Instability in international monetary system

Western Nations (developed country)
United states financed the world using
private capital 

USA -> Germany ->France/UK -> USA

Latin America

Finance thru Government to government

France and UK have to pay back the loans to USA

France and UK requested Germany to pay back for the war

In order to do so US make loans to Germany thru private capita l(JP morgan)

This resulted in US being the international currency

Brazil have strong trade flows to Germany to use marks

1944 - 1973

Bretton woods: In dollar we trust?

Agenda after WWI :

We need to avoid another world war.

 So they need to create peace, prosperity and unity between nation. So multilateral agent (organization) were created to ensure their countries united.

Contract was sign in Bretton woods between 46 nations.

  1. US Dollar = Gold
  2. IMF + World Bank
  3. UN
  4. GATT(general agreement trade agreement)

Design something that will avoid savings from being transferred to developed economies.

  1. Increase trade

  1. Best way to avoid capital flows, build a system with no capital flows
  1. Current account of balance payment =0
  1. No “capital flows!”

Read book “the globalization of Capital)

1960s

London Bank systems  

Bretton woods wanted to increase trade

London Bank system

Q regulations in US : Celling to interest rates to central bank

Cold war

Need to increase liquidity in markets

Deposits in USD with full convertibility to any European currency

-Useful for Big companies like GM to pay their workers in EU countries

Deposit flows from US to Europe

Eastern European countries/ Socialist country didn’t want to deposit money in London bank system denominated in US$

-So they deposit them in international assets in Europe

1974 - 1982

Oil shock and the first south of south capital flows

(apply concept of CA of BPin the imbalance of 70’s) : by Brender and Pisani

2 oil shocks 1974 & 1979

-Iran war etc

-Oil producers are not align with USA

Correlations between Oil producers CA

Where did this surplus go?

Compared to 1973 Sharp rise in price 3x by 1975 and 10x 1980

Then 1980-1981: Sharp drop in price

When crude oil prices increase oil producing countries get more surplus in their current account

Flow of capital

  1. Producer increase surplus
  2. CA
  3. Euro money markets
  4. New York city private banks(citibank)
  5. Latin America’s /Asia/ middle east governments

1974’s Case illustration

Oil producing countries(middle east)

US & EU

LA / Asia

Developing countries

Remarks ( outcome )

CA > 0

CA > 0

CA > 0

Impossible

CA appx 0

CA apprx 0

CA apprx 0

Possible

CA > 0

CA < 0

(still not enough to keep surplus)

CA < 0

(so remainder to LA/Asia etc)

CA < 0 : Deficit

CA > 0 : Surplus

//but this means no one is buying the oil

//IMPOSSIBLE:  NO OIL NO PRODUCTION
EVERYONE USES OIL. IF WE DON’T THE GDP DECLINES IN THE WHOLE WORLD AND DECLINE IN INFLATION(CAUSING DEFLATION),
WE WONT BE ABLE TO PRODUCE AND GDP WILL DECLINE

// The trade balance surplus of one nation will be the deficit of another nation

// therefore the current a/c surplus will be deficit of another nation

...

...

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