Question

Summary on Latin America Crises

Answer 1

Latin American Crises

Import Substitution was adopted by Latin American countries in order to promote industrialisation and move towards self-sufficiency. One of the motivations for resorting to import substituition was the fall in Latin American exports following the Great Depression of 1930s. Latin American countries basically exported primary goods and imported almost all industrialised goods consumed and a fall in the exports prevented them from importing the industrialized goods that prompted the countries to produce the industrialized goods at home. The process of industrialization required the countries to borrow huge funds from international creditors. Since most of Latin American countries were soaring at the time, they could easily manage generating funds and begin restructuring their respective economies.

However, as oil prices began to surge, the economies slowly found themselves in a liquidity crunch. With rising interest rates in USA and Europe in 1979, debt payments increased, making it difficult for the economies to repay their debts. As the international capital market realized the situation in Latin America, the crises began to unfold. As short term borrowings matured, it became difficult to renew loans further. Most commercial banks refrained from granting loans, further deteriorating the crises. Consequently, economic growth rates declined, unemployment increased, income levels and imports dropped.

In the following years, most countries abandoned import substituition and adopted export oriented industrialization, the neoliberal strategy ( favouring free market economy) encouraged by the IMF.

(Reference: Wikipedia)