Academic journal article MACLAS Latin American Essays

Latin America's 1980's and Asia's 1990's Debt Crisis: A Comparison

Academic journal article MACLAS Latin American Essays

Latin America's 1980's and Asia's 1990's Debt Crisis: A Comparison

Article excerpt

I

Latin America's Foreign Debt crisis of the 1980s has had profound repercussions that resulted in fundamental changes in the process of Economic Development and the economic structure of several Latin American countries. Asia's Foreign Debt crisis of the 1990s has resulted in comparable repercussions that changed the economic development process and economic structure of several Asian countries. This paper compares the Mexican 1980s crisis with the South Korean 1990s crisis. It focuses on the characteristics economic development strategies, international financial crisis, and the effects of the conditionality on their economic structures. Part II of the paper presents the economic development process and the strategies pursued by these two countries. Part III presents the genesis of the international liquidity crisis. Part IV presents the effects of the conditionality followed by our conclusions.

II

Mexico and Korea are amongst the few Developing countries to have attained the status of Newly Industrialized Countries (NIC's). Their drive towards industrialization had similarities during their early stages of development, however, they pursued different strategies to attain higher stages of economic development.

Mexico's drive toward industrialization became a conscious government policy with the Amendment to Article 28 of the Liberal Constitution in 1938. This Article demarcated the areas of economic activity that government and private entrepreneurs could enter. Industries such as Petroleum, Mining, Electricity and Banking were designed "strategic", hence, they were reserved for the Government. What was considered nonstrategic was left to private entrepreneurship. The government pursued an Import substitution Industrialization policy. Domestic producers who could produce domestically goods so far imported were given protection from foreign competition in the form of tariffs and embargo; also, these producers had access to subsidized funds from the Government owned NAFINSA (Development Banks).

As a result, Mexico, by the 1950s had largely completed the import substitution of consumption goods. It was perceived that the development process was stalling in the 1960s. Mexico could not export manufactured goods to the US because it could not overcome the US barriers that protected US producers. Consequently, an aggressive policy to move the import substitution of durable goods was implemented. The governments investment expanded into consumption, intermediate and durable goods industries producing goods such as sugar, steel, and trucks. Most of the output of government owned and private firms was for the domestic market.

The import substitution of consumption goods had been financed mainly with the earnings of traditional exports such as minerals; however, the production of durable goods required foreign expertise as well as funds. Thus, Mexico borrowed from abroad; in the process, it acquired a foreign debt. The discovery of vast oil reserves in the 1970s allowed Mexico to continue the import substitution of durable goods with reinvigorated impetus, which was financed in part with a large increase of the foreign debt.

Korea's economy had been linked to the Japanese economy since pre WWII. After the war, Korea in an effort to reactivate its economy, initiated a drive to industrialize via import substitution. Korea used tariff protection, multiple foreign exchange and controls. The import substitution of consumption goods had been financed mainly with the proceeds of traditional exports, such as minerals that had been developed during the Japanese occupation. When the import substitution of consumption goods was completed, it could not continue with this strategy. Korea, a natural resource poor country, could not finance it.

The U.S. officials wanted to see Korea succeed in developing its economy. Korea was a product of the Cold War. The U.S. had soldiers stationed on Korean soil since the Korean War (1950-53). …

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