11
International lending to developing countries: the surge in international lending, 1974-1982
The oil shocks of the 1970s led to a surge in private international lending to developing countries. Four forces combined to create the surge.
12
International lending to developing countries: the surge in international lending, 1974-1982
– Third, in developing countries, the 1970s was an era of peak resistance to foreign direct investment, in order to gain access to the higher returns offered in developing countries, banks had to lend outright to governments and companies in these countries.
8
Taxes on international lending
If a country looms large enough to have power over the world market rate of return, it can exploit this market power to its own advantage, at the expense of other countries and the world as a whole. (nationally optimal tax) see figure 7.1 for an illustration
Basic assumptions: the world is stable and predictable, and borrowers fully honor their commitments to repay.
6
Gains and losses from well-behaved international lending
– Fourth, “herding” behavior meant that the lending to developing countries acquired a momentum of its own once it began to increase.
13
International lending to developing countries: the debt crisis of 1982
During the 1920s, a large number of foreign governments borrowed from the United States. The depression in the 1930s led to massive defaults by developing countries. From then on lending to developing countries remained very low for four decades.
International capital flows can be well-behaved and badly-behaved, these are the main points of this chapter.
5
Gains and losses from well-behaved international lending
3
International Lending and Financial Crises
Direct investment
Private lending and investing
Long term
loans
Portfolio investment
International capital flows
Financial crises
– Why did many financial crises occur? – How can we resolve them? – What might we be able to do to make them less
frequent?
2
International Lending and Financial Crises
– First, the major international private banks gained large amounts of petrodollars to be lent to other borrowers.
– Second, there was widespread pessimism about the profitability of capital formation in industrialized countries. Attention began to shift to developing countries, which had long been forced to offer higher rates of interest and dividends to attract even small amounts of private capital.
In international financial capital flows, the lenders (investors) give the borrowers money to be used now in exchange for IOUs or ownership shares entitling them to interest and dividends later.
9
International lending to developing countries
International lending and borrowing between industrialized countries generally is well-behaved and provides mutual benefits. But international lending by industrialized countries to developing countries is another story. There are periodic international crises in which lending from industrialized countries to developing countries cannot be paid back. If a country cannot pay back the money, we say it defaults.
Chapter 7
International
Lending and Financial Crises
1
International Lending and Financial Crises
An analysis of the benefits of international lending and borrowing.
4
International Lending and Financial Crises
International capital flows can bring two types of benefits.
– First, it represents intertemporal trade, in which the lender gives up resources today in order to get more in the future, and the borrower gets resources today but must be willing to pay back more in the future.
Short term
official lending and investing
Lending to foreign borrower
Purchasing bonds issued by a government or a foreign enterprise
See p157 for more details
The gains from the free capital flows are split between the countries. (see figure 7.1)
But not everyone in the countries can benefit from the capital flows, someone are harmed.
International capital flows are conventionally divided into different categories by type of lender (private versus official), m), by existence of management control (direct versus portfolio), and by type of borrower (private or government).
Percent year
MPKof U.S.A
S
U
T
f
d