International Economic Linkages and the International Debt Situation

"Coping with the debt crisis" was a major recurrent theme in international economic affairs during the 1980s. Managing the legacy of the crisis remains a major challenge of the 1990s, both for OECD creditor countries and for the debtor countries themselves. During the 1980s, following the Mexican payments crisis of August 1982, a number of debt "plans" and "strategies" have been introduced, but overall progress has been slow; one major achievement, however, has been to avoid a major banking crisis. This article results from a project to investigate the relationship between macroeconomic developments in OECD countries and those in debtor countries'. From the light that this throws on the interaction of international linkages, including those between OECD macroeconomic policies and debtor countries, we can better understand why many of the hopes and expectations of these plans were not realised. To analyse the relationship, between the macroeconomic environment, debt, and economic performance, the approach taken here was to build small macroeconometric models for Latin America (DEMOD) that are simulated in combination with the OECD world model, INTERLINK2. These models, whose broad structure is outlined in the Appendix and described more fully in Dittus and O'Brien (1990), take many variables from INTERLINK, analyse their impact on Latin America, and then provide feedback to the main system. This builds on the strengths of INTERLINK - its global character, providing explicit modelling of international linkages of trade volumes, prices, interest and exchange rates, as well as assuring world consistency - wi$h the additional benefit of more detailed information on Latin American debtor countries. The following section provides a brief overview of the history of the debt crisis during the 1980s. It is followed by three sections which look at different aspects of the relation between debt and macroeconomic developments. First, we look at the influence of the world economy and of domestic policies on the evolution of the debt crisis from 1982 to 1986; then we look at some conditions under which new money packages may be beneficial, and discuss how debtreduction schemes fit into this picture; following this, we consider the impact that macroeconomic imbalances - another recurring theme of the 1980s - may have on Latin America performance and the debt situation. The final section draws some conclusions