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Balance of
Payments,
Developing-Country
Debt, and the
Macroeconomic
Stabilization
Controversy
• Exports (+)
• Imports (-)
• Investment income (+)
• Debt-service payments (-)
• Net remittances and transfers (+)
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-3
The Balance of Payments
• Consequence:
– Surplus: increase in cash reserves account
– Deficit: decrease in cash reserves account
Fn = dD
D = total external debt
d = percentage increase in total external
debt
BT = dD – rD = (d - r)D
Western Banks:
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-19
The Mechanics of Petrodollar
Recycling
Success in LDCs:
• Reduce inflation
• Improve balance of payments
• Eliminate parallel exchange rates
• Improve economic efficiency
• Double standards
– Harsh adjustments for the LDCs
– No adjustment for the MDCs
• Lending agencies
– Agents of international capitalism
– Increase LDC dependence and poverty
– Prefer short-term to long-term developmental loans
– Provide funds for corrupt LDC governments
Copyright © 2009 Pearson Addison-Wesley. All rights reserved. 13-23
Global Dimensions of LDC Debt