FOREIGN TRADE UNIVERSITY FACULTY OF BANKING AND FINANCE INTERNATIONAL FINANCE MID-TERM ESSAY A study on Latin American debt crisis in the 1980s and lesson for Vietnam in Public debt management Course: TCHE414(2-1920).1_LT Mentor: Assoc. Mai Thu Hien Author: Group 6 Name ID Vũ Thị Thu Nga 1714450079 Lê Khánh Ngân 1714450022 Vũ Thị Minh Nghĩa 1714450023 Tạ Mai Linh 1714450038 Nguyễn Thạch Thảo 1613340083 MEMBERS’ ROLE No. Name ID Role Rating Vũ Thị Thu Nga 1714450079 1 Write Introduction, 10/10 Conclusion, assign tasks for members Lê Khánh Ngân 1714450022 2 Write Chapter 4 10/10 Vũ Thị Minh Nghĩa 1714450023 3 Write Chapter 3 10/10 Tạ Mai Linh 1714450038 4 Write Chapter 5 10/10 Nguyễn Thạch Thảo 1613340083 5 Write Chapter 3 8/10 i TABLE OF CONTENTS ACKNOWLEDGEMENTS…………………………………………. Objectives of research.
Scope of the research. 7 CHAPTER 2: THEORETICAL BASIS. General theory about Public debt. Definition of Public debt.
Economic nature and impact of Public debt on the economy. Factors affecting Public debt. Debt forms and Public debt tools. Public debt Management.
The importance of Public debt management. Public debt crisis. Causes of Public debt crisis. Consequences of Public debt crisis.
17 CHAPTER 3: LATIN AMERICAN PUBLIC DEBT CRISIS IN THE 1980S. Causes of Latin American Public debt crisis. Progressions of the Latin American Public debt crisis. Impacts of the Latin American Public debt crisis.
Impacts on the Latin American countries. Impacts on the global economy. The reactions and solutions of Latin American countries to the crisis. The reactions of Latin American countries to the crisis.
The measures of Latin American countries to the crisis. 36 CHAPTER 4: VIETNAM PUBLIC DEBT AND LESSON FROM LATIN AMERICAN PUBLIC DEBT CRISIS TO VIETNAM. Current situation of Vietnam public debt. Scale of public debt.
Structure of public debt. The cause of the increase in Vietnam public debt. The impacts of public debt on Vietnam macroeconomy. Lessons from Latin America debt crisis for Vietnam.
Measures to apply lesson from the crisis in Vietnam’s context. Policy recommendation for Public debt management in Vietnam .…………………………………………………………60 iii LIST OF FIGURES Figures 3-1: Latin American external debt and reserve. 20 Figures 3-2: Latin American Total debt, Total debt service and Interest. 21 Figures 3-3: Mexico Crude oil prices from 1861 to 2011.
22 Figures 3-4: Total Debt and Public Debt by Region. 24 Figures 3-5: Decomposition of economic growth (Source: OPEC). Total public debt of Vietnam period 2010 - 2018. Public debt in Asian developing countries.
40 Figures 4-3 Structures of total public debt. 41 Figures 4-4 Structure of total public debt. Structure of Government debt. Structure of Government-guaranteed debt.
Fiscal balance of Vietnam (%). Vietnam's foreign exchange reserves 2016-2019. Vietnam total reserve 2010-2018. 54 LIST OF TABLES Tables 4-1.
Total public debt of Vietnam (billion VND). Public debt payment using budgetary expenditure (billion VND). 46 iv ACKNOWLEDGEMENTS Before going into the main content of the essay, group 6 would like to express our sincere gratitude to the lecturer in charge of the subject, Assoc. Mai Thu Hien, who has accompanied us in the idea development process and advise us to write the outline of the essay.
Your in-depth lectures are the source of inspiration for us to implement this topic and also help us to build the foundation and develop the direction of the essay. However, due to the lacking in expertise knowledge because all members of the group are not students major in Department of Finance and Banking, this essay will surely have many flaws and shortcomings. Our group hopes to receive your profound comments and guidance to help us improve the quality of essay content in the future. Once again, we sincerely thank you.
Lastly, we would like to wish you plenty of good health and contentment to carry on your noble mission of passing on knowledge to future generations Foreign Trade University students. Best regards, Group 6. 1 ABSTRACT This paper will empirically investigates, summarizes and assesses the nature of public debt, the causes and effects of the Latin American public debt crisis in the 1980s, as well as the ways countries behaved during the time of the catastrophe. Furthermore, we will provide a practical analyzation of the situation in Vietnam today on the basis of comparison with international practices and lessons learned from the Latin American debt crisis in order to clarify the present issues and recommend some solutions to public debt management in Vietnam.
Rationale Government debt has been regarded as a major source of capital to finance the economic growth for the less developed or developing countries. Among all influencing factors to an economy, there is the fact that debt emerges as an indispensable part which could affect either positively or negatively to economic stability. Therefore, to a country, good debt management would bring significant benefit to national development, while poor management could, in long-term, lead a country into serious problems, e. high taxation of the domestic consumers, uncontrolled inflation and so on.
In the recent years, foreign debt problem, however, has become one of the basic problems in the developing countries. The debt crisis which occurred in Latin American countries in the early 1980s destabilized the economy of many developing countries with low income. The Latin America’s debt crisis in the 80s also known as “The decade of loss” had started since the 1970s. In that period, countries in the Latin America such as Brazil, Argentina and Mexico had quite an impressive development mainly from the large scale external debt, aiming at developing domestic industries and improve the infrastructure.
However, by 1980s, Latin American countries had faced difficulties in huge debt payment. Since the middle of 1975-1982, the public debts of Latin American countries to financial 2 institutions and World Bank increased at the annual public debt to GDP ratio of more than 20% which raised the total debt from USD 75 billion in 1975 to more than USD 315 billion in 1983. Interest and principal payment increase steadily from USD 12 billion in 1975 to USD 66 billion in 1982. Besides, the global crisis in 1979 and 1980 affected the developing countries in OECD.
So, Latin American countries were incapable of maintaining the high economic growth rate and the foreign payable loan exceeded the earning. Actual income and living standard sharply decreased, followed by the collapse of the dictatorships in the region such as Brazil and Argentina. The Latin America crisis lasted for a period and was gradually over in the early 1990s when countries officially declared the end of “the decade of loss”, totally out of debt crisis and got started for the next period. Vietnam, like many other developing countries, has a high demand for loan in order to implement various socio-economic and infrastructural construction projects.
However, the consequences of the public debt crises that happened in Latin American countries during 1980s are good lessons for the country to be careful with its budgetary decisions. Specially, significant increase in accumulated public debt in Vietnam after the global financial crisis in 2007-08 raises concerns regarding sustainable growth in medium to long-term. In fact, Vietnam’s total public debt increased from approximately 40% of GDP in 2007 to 56.3% of GDP in the end of 2010, slightly decreased to 54.9% of GDP in 2011 due to high inflation. Simultaneously, external debt of the nation increased from 32% to approximately 42% of GDP1.
The remaining challenges in public debt management show that this is the time for a thorough and comprehensive renovation in fiscal policy in order to gradually bring the budget back to its balance and maintaining long-term stability for the economy. Lessons learned from what happened during the past debt crisis, about the causes of the crisis as well as the ways countries behave and resolve the matter can become valuable experiences for Vietnam in the process of reviewing the state of its public debt, suggesting the solutions to minimize and manage public debt effectively, thereby reducing the risks which could lead to a debt crisis. For the above reason, our team chose to study the topic “Public debt 1 The Government’s Report No. 305/BC-CP dated October 30th, 2012 on the situation of public debt.
3 crisis in Latin America in the 1980s and lessons learned for Vietnam” to contribute the issues. Literature review Following the debt crisis in the 1980s, there was intensive research on determinants of a sovereign debt crisis. According to the study of Schclarek and Ramon- Ballester (2005), the data of 20 Latin American and Caribbean nations in five years during 1970 – 2002 were separated seven periods which includes every five years. Furthermore, due to the beginning of economic crisis over the world, most empirical scholars researches the causal relationship between the indebtedness and economic growth by applying a non-linear and concave connection pattern.
Classical economists, such as Smith (1776), Ricardo (1951), and Mill (1845) considered that the public debt effect destructively a country’s economic. The Ricardian Equivalence theory noted that the financing of public expenditure via taxation and borrowing is equal. Governments can finance their expenditures either through taxes or by issuing bonds. Since bonds are loans, they must eventually be repaid—presumably by raising taxes in the future.
Suppose that the government finances some extra spending through deficits. According to the hypothesis, taxpayers will anticipate that they will have to pay higher taxes in future. As a result, they will increase their savings to pay the future tax increase; they could reduce their current consumption to do so. The effect on aggregate demand would be the same as if the government had chosen to tax now.
Therefore, there is neutral effect of public debt on economic growth. On the contrary, in the Investment Saving-Liquidity Preference Money Supply (IS- LM) model, Keynesian economists pointed out that an increase in government debt, which induced by deficit financed fiscal policy, will improve the level of income, the transaction demand for money and prices. Keynesian economists often argue that private sector decisions sometimes lead to inefficient macroeconomic outcomes which require active policy responses by the public sector, in particular, monetary policy actions by the central 4 bank and fiscal policy actions by the government, in order to stabilize output over the business cycle. Harmon (2012) studies the impact of public debt on three major economic indicators (inflation, GDP growth and interest rates) in Kenya on the period 1996 to 2011.
Adopting a descriptive research design and simple linear regression models, the research finds out there is a weak positive relationship between the public debt and inflation while links between public debt – GDP growth as well as public debt – interest rates are negative. Ahmad (2012) confirm that inflation is a critical problem in many countries, especially in the less developed countries. Using the OLS regression estimation, their paper empirically studies the effect of domestic debt on inflation in Pakistan for the period 1972 to 2009. The research observes domestic debt and domestic debt servicing enhance the price level in Pakistan.
The estimated results show the volume of domestic debt and domestic debt servicing have significantly positive effects on price level. Authors argue the floating debt, i. treasury bills make up a large proportion of total domestic debt, and the interest rate, i. the cost of domestic borrowing or debt servicing are main reasons to enhance price level.
Until now there are few studies on impacts of public debt in literature emphasized on countries in the ASEAN region. One example is Muhammad (2017). Other authors focused on individual countries such as Muhammad (2008), Pham (2011), Lee & Ng (2015).