Foreign Borrowing Policy

1120 Words5 Pages
Internal reasons: Country's policies potentially affect a country’s vulnerability to debt-serving problems, particularly if the external economic environment becomes unfavorable. According to Cuddington( 1989, pp32), the policies would effected include external borrowing strategy, exchange rate management, trade orientation and aggregate demand policies. This essay would explain two key policies. Foreign borrowing policy When considering the foreign borrowing policy, two questions need to be addressed: Did the developed countries borrowed too much and Were the borrowed funds used efficiently? 1) Did the developed countries borrowed too much? Statistical evidence showed that at the year of 1983,$315 billion borrowed by Latin America, or 50% of its GDP. So obviously the borrowed amount is over its payback ability. 2) Were the borrowed funds used efficiently? Ostensibly, the funds were intended to help to finance productive development projects,such as factory and manufacturing line. Some of the funds did go for such purpose such as Brazil, which achieved significant advances in its industrial infrastructure during the 1970s. But for the most parts, the loans financed less respectable activities. The Latin American borrowing was wasteful or unjustified in that it primarily financed projects such as consumptions of high living by the elites, government deficits and capital flight. Between 1976-81, total amount borrowed that estimated by all Latin countries amounted to $272.9 billion, 91.6 percent went for capital flight, debt servicing, and building up dollar reserves. Only 8.4 percent was used for domestic investment, and of that, much was squandered. In Africa, the magnitude of borrowing was only a small fraction of that... ... middle of paper ... ...ey were not successful. Inefficient Industrialization emerged due to insufficient domestic market to support the production of many manufactured products. Limited market size of Latin American countries constrained the effectiveness of ISI. Also, due to the protectionism of local government of local industries, many sectors could produce inefficiently, and charging higher prices than foreign counterpart suppliers. Another reason for higher cost was due to the ISI process became highly dependent on foreign capital import and expensive production technologies. What's more, the ISI model also create unemployment. The evidence shows that in 3 decades when ISI was put in place in Latin America, the increase rate of labour force always higher than the rate of employ needs, due to combined effects of internal migration and use of modern labour saving production technology .
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