COURSE : Winners & Losers in the Global Economy: From Developmental Nationalism to Neo-liberalism The 1930’s crisis and its impact on Latin American economies April 1st - CLASS 6

Slow growth of world trade. LA had to redefine its trade strategies, gain market share in other commodities demanded by the Nations at war. The US had emerged from the war with its world economic and financial position greatly strengthened. Economic performance remained heavily dependent on the fortunes of the export sector. Exports still accounted for a high proportion of the GDP.

Slow growth of world trade.

LA had to redefine its trade strategies, gain market share in other commodities demanded by the Nations at war.

The US had emerged from the war with its world economic and financial position greatly strengthened.

Economic performance remained heavily dependent on the fortunes of the export sector. Exports still accounted for a high proportion of the GDP.

THE GREAT DEPRESSION

Structural change in the 1930s After WWI, virtually all export earnings came from PRIMARY PRODUCTS and nearly 70% of external trade was conducted with only 4 countries: US, GB, France and Germany. On the eve of the Great Depression the Latin American economies continued to follow a DEVELOPMENT MODEL that left them highly vulnerable to adverse conditions in the world markets for primary products.

After WWI, virtually all export earnings came from PRIMARY PRODUCTS and nearly 70% of external trade was conducted with only 4 countries: US, GB, France and Germany.

On the eve of the Great Depression the Latin American economies continued to follow a DEVELOPMENT MODEL that left them highly vulnerable to adverse conditions in the world markets for primary products.

The Depression of 1929 Stock-market crash on Wall Street in October 1929 . For LA: some of the warning signals came earlier. Commodity prices in many cases peaked before 1929: as supply (restored after wartime disruption) tended to outstrip demand. The boom in stock markets before Wall Street crash: led to excess demand for credit and to a rise in world interest rates = reducing demand for many of the primary products exported by LA. The rise in interest rates increased flight capital and capital inflows declined.

Stock-market crash on Wall Street in October 1929 .

For LA: some of the warning signals came earlier.

Commodity prices in many cases peaked before 1929: as supply (restored after wartime disruption) tended to outstrip demand.

The boom in stock markets before Wall Street crash: led to excess demand for credit and to a rise in world interest rates = reducing demand for many of the primary products exported by LA.

The rise in interest rates increased flight capital and capital inflows declined.

The Depression of 1929 The stock-market CRASH in October set in motion a chain of events in the MAIN MARKETS supplied by LA: 1929 Crash 1. The fall in the value of financial assets reduced consumer demand . 2. Loan defaults led to a squeeze on new credit and to monetary contraction. Dramatic FALL in primary-product prices. Every LA country was affected (between 1928 and 1932 the unit value of exports fell by more than 50% in 10 countries). 3. Although interest rates started to fall at the end of 1929, importers were unwilling to rebuild stocks of primary products in the face of falling demand.

The stock-market CRASH in October set in motion a chain of events in the MAIN MARKETS supplied by LA:

Dramatic FALL in primary-product prices.

Every LA country was affected (between 1928 and 1932 the unit value of exports fell by more than 50% in 10 countries).

The Depression of 1929 Falling export prices for all counties + falling export volumes for most countries = SHARP DECLINE IN THE PURCHASING POWER OF EXPORTS. While export and import prices were falling after 1929, one “price” remained then same: the FIXED NOMINAL RATE on public and private FOREIGN DEBT. As other prices fell, the real interest rate on this debt (mainly government bonds) rose, increasing the FISCAL and BALANCE-OF-PAYMENTS burden. The combination of unchanged debt-service payments and falling export receipts exerted a strong squeeze on IMPORTS. Falling government revenue + fixed debt-service payments = INTENSE PRESSURE ON GOVERNMENT EXPENDITURES. LA was not able to borrow and ask for help from international loans because the flow of new lending had stopped by 1931.

Falling export prices for all counties + falling export volumes for most countries = SHARP DECLINE IN THE PURCHASING POWER OF EXPORTS.

While export and import prices were falling after 1929, one “price” remained then same: the FIXED NOMINAL RATE on public and private FOREIGN DEBT.

As other prices fell, the real interest rate on this debt (mainly government bonds) rose, increasing the FISCAL and BALANCE-OF-PAYMENTS burden.

The combination of unchanged debt-service payments and falling export receipts exerted a strong squeeze on IMPORTS.

Falling government revenue + fixed debt-service payments = INTENSE PRESSURE ON GOVERNMENT EXPENDITURES.

LA was not able to borrow and ask for help from international loans because the flow of new lending had stopped by 1931.

Short term-stabilization External shocks associated with the depression created 2 DESEQUILIBRIA that each Republic has to address: During the 1920s LA had adopted the gold-exchange standard: in which adjustment to external disequilibrium was supposed to be automatic. i.e. X, gold or foreign exchange would be drained out of the country, lowering money supply, credit and demand for imports. After 1929, the decline in the value of exports was so severe that it was not clear whether external disequilibrium could be restored automatically. Most countries either abandoned the system (Arg 1929) or limited outflows of gold and foreign exchange through banking and other restrictions. INTERNAL IMBALANCE Caused by the decline in government revenue, which gave rise to budget deficits that could no longer be financed from abroad. EXTERNAL IMBALANCE Created by the collapse of earnings from exports and the decline in capital inflows.

External shocks associated with the depression created 2 DESEQUILIBRIA that each Republic has to address:

During the 1920s LA had adopted the gold-exchange standard: in which adjustment to external disequilibrium was supposed to be automatic.

i.e. X, gold or foreign exchange would be drained out of the country, lowering money supply, credit and demand for imports.

After 1929, the decline in the value of exports was so severe that it was not clear whether external disequilibrium could be restored automatically.

Most countries either abandoned the system (Arg 1929) or limited outflows of gold and foreign exchange through banking and other restrictions.

Short term-stabilization After the short world depression (1920-1), many LA republics had created Central Banks and struggled for monetary discipline. The 1929 depression was seen as the first real test of institutions, so there was a reluctance to admit failure through currency depreciation. The decision of GB and the US to abandon the gold standard Forced all the republics to address the problem of EXCHANGE-RATE MANAGEMENT. (Most republics tried to link their currencies to the US dollar or to the pound sterling. Genuinely floating currencies were rare). So, the way to achieve external equilibrium was through exchange control and a non price rationing system for imports.

After the short world depression (1920-1), many LA republics had created Central Banks and struggled for monetary discipline.

The 1929 depression was seen as the first real test of institutions, so there was a reluctance to admit failure through currency depreciation.

The decision of GB and the US to abandon the gold standard

Forced all the republics to address the problem of EXCHANGE-RATE MANAGEMENT.

(Most republics tried to link their currencies to the US dollar or to the pound sterling. Genuinely floating currencies were rare).

So, the way to achieve external equilibrium was through exchange control and a non price rationing system for imports.

Short term-stabilization Internal equilibrium was different because a government could always issue its own currency to finance a budget deficit. Budget deficits persisted despite the efforts to raise revenue and cut expenditure. In the absence of external loans, the deficits had to be financed through the banking system. The small number of banks and their high public profile created an incentiveb to avoid bank failure. Thus monetary policy in the depth of the Depression was relatively slack in many republics so internal equilibrium had not been restored by the end of 1932. INTERNAL IMBALANCE Caused by the decline in government revenue, which gave rise to budget deficits that could no longer be financed from abroad. EXTERNAL IMBALANCE Created by the collapse of earnings from exports and the decline in capital inflows.

Internal equilibrium was different because a government could always issue its own currency to finance a budget deficit.

Budget deficits persisted despite the efforts to raise revenue and cut expenditure.

In the absence of external loans, the deficits had to be financed through the banking system.

The small number of banks and their high public profile created an incentiveb to avoid bank failure.

Thus monetary policy in the depth of the Depression was relatively slack in many republics so internal equilibrium had not been restored by the end of 1932.

Short term-stabilization Cuts in the public sector wage-and-salary bill were made more difficult by the turbulent political circumstances, so policies for reducing the budget deficit came to FOCUS on DEBT-SERVICE PAYMENTS. DEBT DEFAULT was not new in LA economic history: At first they made an effort to maintain debt-service payments, to preserve access to international capital markets. Default was unilateral but no country repudiated its external debts, but internal equilibrium was still a distant goal in most republics.

Cuts in the public sector wage-and-salary bill were made more difficult by the turbulent political circumstances, so policies for reducing the budget deficit came to FOCUS on DEBT-SERVICE PAYMENTS.

DEBT DEFAULT was not new in LA economic history:

At first they made an effort to maintain debt-service payments, to preserve access to international capital markets.

Default was unilateral but no country repudiated its external debts, but internal equilibrium was still a distant goal in most republics.

Recovery from Depression The policies adopted to stabilize each economy in response to the Depression were intended to restore internal and external equilibrium in the short term. The collapse of export prices after 1929 favored the nonexport sector in terms of relative prices. The import-competing sector consisted of all activities that were capable of substituting for imports, which increased its output. Recovery was assured only if the import-competing sector expanded without a fall in the export sector, or if it the import-competing sector grew so rapidly that it could compensate for export decline. By 1932, stabilization programs were successful in restoring external equilibrium but not in eliminating budget deficit. Recovery from the Depression, in terms of real GDP, began after 1932, but the speeds of recovery varied considerably.

The policies adopted to stabilize each economy in response to the Depression were intended to restore internal and external equilibrium in the short term.

The collapse of export prices after 1929 favored the nonexport sector in terms of relative prices.

The import-competing sector consisted of all activities that were capable of substituting for imports, which increased its output.

Recovery was assured only if the import-competing sector expanded without a fall in the export sector, or if it the import-competing sector grew so rapidly that it could compensate for export decline.

By 1932, stabilization programs were successful in restoring external equilibrium but not in eliminating budget deficit.

Recovery from the Depression, in terms of real GDP, began after 1932, but the speeds of recovery varied considerably.

Recovery from Depression Growth-accounting equation: 1) import substitution 2) export promotion 3) growth of home final demand Increases in private consumption (the most important element in home final demand) were a necessary condition for industrial growth in the 1930s. As home demand recovered, domestic firms were provided with an excellent opportunity to satisfy a market in which the relative price of imports had increased.

Growth-accounting equation:

1) import substitution

2) export promotion

3) growth of home final demand

Country GROUPS 1. Faisal Baeshan 2. Jason Levin 3. Elisabeth Tilstra 4. Josh Love 5. Sabrina Chan 6. Mikaela B. 1. John Sarlin 2. Jeremy Green 3. Maureen Jones 4. Melissa Ginsburg 5. Jordyn 6. Emily Rackleff 1. Ayanda 2. Katya 3. Jacky Bealer 4. Ali Rowell 5. Carl 6. Kevin Hall 1. Ashley Decleene 2. Sarah Warner 3. Mike Johnston 4. Sarah Burns 5. Trevor Brooks 6. Kyle Sharef MEXICO Week 11 CHILE Week 10 ARGENTINA Week 9 BRAZIL Week 8

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