Chapter 14: Developing Countries and International Finance I: The Latin American Debt Crisis

Multiple Choice Questions

1. According to research cited by Oatley, many studies have found that one dollar of additional foreign capital in a developing country produces additional investment of a) fifty cents. b) seventy-five cents. c) one dollar. d) two dollars. e) three dollars.

Answer: c

2. In 2020, the advanced industrial countries together provided bilateral assistance to developing countries in the amount of a) $33 billion. b) $63 billion. c) $101 billion. d) $114 billion. e) $163 billion.

Answer: d

3. In 2020, the World Bank and other multilateral development agencies provided an additional development assistance of a) $57 billion. b) $47 billion. c) $71 billion. d) $81 billion. e) $91 billion.

Answer: b a) United States b) Japan c) Germany d) France e) United Kingdom

4. Of the following countries, which is the least generous in providing foreign aid as a percentage of its national income?

Answer: a

5.In general, private capital typically constitutes somewhere between a)one tenth and one quarter of all capital flows to the developing world. b)one quarter and one third of all capital flows to the developing world. c)one third and one half of all capital flows to the developing world. d)one half and two thirds of all capital flows to the developing world. e)two thirds and three quarters of all capital flows to the developing world.

Answer: e

6.The World Bank estimates that total remittances rose from less than $50 billion in 1990 to almost a)$442 billion by 2021. b)$556 billion by 2021. c)$615 billion by 2021. d)$702 billion by 2021. e)$810 billion by 2021.

Answer: d

7.In the 1950s and 1960s the principal sources of foreign capital for developing countries were a)FDI and foreign aid and neither was abundant. b)SWF and foreign aid and neither was abundant. c)FDI which was abundant and foreign aid which was not. d)foreign aid which was abundant and FDI which was not. e)FDI and foreign aid and both were abundant.

Answer: a

8.Between 1956 and 1970, the amount of aid provided through multilateral development agencies increased a)by 50%. b)by 150%. c)by 250%. d)by 400%. e)by 500%.

Answer: d b)decolonialization. c)commonwealth. d)free trade. e)sovereign wealth funds.

9.The expansion of foreign aid programs during the 1960s reflected changing attitudes in advanced industrial countries as largely a product of the dynamics of a)globalization.

Answer: b

10.As a result of the oil price increases and other factors, budget deficits in Latin America by the end of the 1970s on average were about a)4.5% of GDP. b)5.4% of GDP. c)6.7% of GDP. d)7.4% of GDP. e)9.4% of GDP.

Answer: c

11.Between 1970 and 1980, the developing world debt as a whole to foreign lenders went from a)$172.7 billion to $856.7 billion. b)$72.7 billion to $586.7 billion. c)$27.7 billion to $186.7 billion. d)$172.7 billion to $686.7 billion. e)$72.7 billion to $436.7 billion.

Answer: b b)seven. c)ten. d)twelve. e)fifteen.

12.The foreign debt of the seven most heavily indebted Latin American countries between 1970 and 1982 increased by a factor of a)five.

Answer: c

13.In the late 1970s and early 1980s, Latin American countries were vulnerable to a)rising debt service ratios. b)lower interest rates. c)lower migrant remittances. d)higher export revenues. e)lower export revenues.

Answer: a

14. According to Oatley, abrupt cessation of commercial bank lending in Latin America in the early 1980s, a) allowed many debtor countries to finance large current account deficits. b) no longer allowed governments to pay for increased energy exports. c) allowed governments to invest more than they could have otherwise. d) ended the economic boom of the 1970s abruptly. e) relaxed many of the constraints that had characterized the foreign-aid dominated system of the 1950s and 1960s.

Answer: d

15. By 1982, the thirty most heavily indebted developing countries owed more than $600 billion to foreign lenders. Creditors initially diagnosed the debt crisis as a a) long-term liquidity problem. b) medium-term liquidity problem. c) short-term liquidity problem. d) failure of ISI trade policies. e) medium-term energy related problem.

Answer: c

16. The center piece of macroeconomic stabilization program intended to eliminate the large current-account deficits was the reduction of a) capital outflows. b) unemployment. c) exports. d) budget deficits. e) MNC profits.

Answer: d

17. In the 1980s many developing countries were allowed to reschedule their existing debt payments. These rescheduling agreements a) forgave some debt. b) reduced interest payments on the debt. c) reduced interest rates on the debt. d) required prior approval by the IMF on the content of the stabilization package. e) reduced the number of years allowed for repayment of the debt.

Answer: d a)These agreements reduce economic growth. b)These agreements raise unemployment. c)These agreements are inappropriately “one size fits all”. d)These agreements push vulnerable segments of society deeper into poverty. e)These agreements make private foreign lenders more unwilling to invest.

18. IMF conditionality agreements have long been a source of controversy. Which of the following statements is not criticism of these agreements?

Answer: e

19.Creditors were able to push such a large share of the adjustment costs onto the debtor governments because a)debtor governments were better at maintaining a common front. b)creditors were better able to solve the free rider problem better than debtors. c)smaller banks had lent less of their capital. d)larger banks could charge their losses to taxpayers in advanced industrial countries. e)the IMF threatened to make it difficult for the smaller banks to operate in the interbank market.

Answer: b

20.According to Oatley, governments in debtor countries never threatened collective default primarily because a)creditors would offer “special deals” to induce particular governments not to join a default coalition. b)they were afraid of future IMF retaliation. c)they knew it would destroy their credit rating. d)they knew all debt would still have to be repaid in the long run. e)they feared invasion by advanced industrial countries to seize their resources like they did in the 1920s and 1930s.

Answer: a

21.During the 1980s, the most accurate estimate of Argentina’s average inflation rate per year was over a)150%. b)300%. c)500%. d)700%. e)900%.

Answer: d a)Altered power of previously favored interest groups b)The Brady Plan c)Long-run costs would be offset by short-term gains d) Latin American recognition of the East Asian model’s successes e)Commercial banks would be the primary beneficiary of reform

22.According to Oatley, which of the following was not a reason that induced developing governments to embark on economic reform in the 1990s?

Answer: c

23.The Brady Plan debtor governments could convert a)existing commercial bank debt into bond-based debt with a lower face value. b)existing foreign bank debt into bond-based debt with a lower face value. c)existing commercial bank debt into bond-based debt with a higher face value. d)e xisting bond-based bank debt into commercial bank debt with a lower face value. e)e xisting bond-based bank debt into commercial bank debt with a higher face value.

Answer: a

24.The Latin American debt crisis was declared over in the mid-1990s. According to Oatley, in hindsight, it is clear that a)it was more of a financial crisis than an economic development one. b)it was more of an economic development crisis than a financial one. c)structural adjustment policies of the IMF pushed most of the costs onto the foreign commercial banks. d)more generous foreign aid would have prevented the crisis. e)reforms did not provoke enough changes in Latin American political and economic systems.

Answer: b

25. The Latin American debt crisis also forced governments in the advanced industrialized world to establish a)a regional regime to manage the crisis. b)an international regime to manage trade. c)an international regime to manage the crisis. d)a remittance regime to manage the crisis. e)a foreign aid regime to manage the crisis.

Answer: c

True-False Questions

1. At the center of the difficult relationship between developing countries and the international financial system is a seemingly inexorable boom-and-bust cycle.

Answer: True

2.Developing countries continue to draw on foreign capital because they do not understand that the political dangers outweigh the economic benefits.

Answer: False

3.Throughout the postwar period, private capital flows have been larger than foreign aid flows.

Answer: True

4.Foreign aid by China is about the same as to other regions in the developing world.

Answer: False

5.Political instability is one of the most important reasons why sub-Saharan Africa attracts so little private capital.

Answer: True : s: -

6.Developing societies import foreign capital because it makes it possible to finance more investment at a lower cost than relying solely on their domestic savings.

Answer: True

7.The Cold War did not contribute to the tremendous growth of foreign aid programs during the 1960s.

Answer: False

8.Rising American interest rates in the early 1980s were transferred directly to Latin America because two-thirds of Latin American debt carried variable interest rates.

Answer: True

9.Structural adjustment programs were controversial because they sought to reshape the indebted economies by increasing the government’s role and reducing that of the market.

Answer: False

10. The Brady Plan strengthened the incentive to embark on reform by increasing the domestic benefits of reform. Large debt burdens reduced the incentive to adopt structural reforms because a significant share of the gains from reform would be dedicated to debt service.

Answer: True