Question

In: Economics

What are the main causes and consequences of the 1982 debt crisis?

What are the main causes and consequences of the 1982 debt crisis?

Solutions

Expert Solution

Main causes of 1982 debt crisis:

  • Non productive investments: GATT stated that the loans that were taken by the developing countries mainly were used for unproductive sectors of poor countries, thus not giving rise to real investments.
  • Oil price: Oil price began to skyrocket after 1971. Developed countries were able to cushion the effects but developing countries turned to foreign borrowing, resulting in debt.
  • Interest rate : There was a new policy which suggested to keep the interest rate above inflation. New loans contracted in order to pay off maturing loans carried a higher rate of interest which raised average rate of interest on the portfolio of developing countries. The third world borrowers had two choices. It was either to increase debt in order to keep inflation-adjusted debt stock constant or to borrow less to avoid high interest rates and thus,observe a fall in the real value of the inward transfer.
  • Exchange rate: There was exchange rate detoriation with US dollar. Latin American Governments owed a huge amount of national currency and also lost their purchasing power. Trade was affected.

Consequences:

  • Stagnation of economic growth.
  • Massive unemployment.
  • Increase in rate of crimes.
  • High rate of inflation.
  • Increase in poverty gap.
  • Fall in per capita incomes
  • Fall in imports.
  • Investment which could have been used for productive purposes were now being used to pay off debt.

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