'The Most Significant Outcome Of The New Economic Model In Latin America Is A Rise In Poverty And Inequality'. Discuss. The New Economic Model (NEM) was a system that was put into action following the 1982 debt crisis

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‘The Most Significant Outcome Of The New Economic Model In Latin America Is A Rise In Poverty And Inequality’. Discuss.

The New Economic Model (NEM) was a system that was put into action following the 1982 debt crisis, in Latin America. Basically Latin America could not continue using the same economic strategies, as they were faced with debts, which they could not afford to repay. They tried a number of different methods, in looking to solve the debt crisis, including large-scale import substitution, but after the short-term positive effects of these began to subside, they were in search of a new economic strategy, which the NEM turned out to be (Bulmer-Thomas. 1996. p1). My aim is to look over the NEM in general, in Latin America and assess the results of the scheme. I will look at the results and will gauge the major outcomes resulting from the NEM and state what I believe the most significant affects are. It is important to look at the particular groups of people that have been affected, because a positive outcome for a member of the social elite may not be a positive outcome for the general public. In greater depth I will focus on poverty and inequality, in order for me to find out to what extent the overriding statement is true.

The debt crisis

The NEM was implemented as a retort to the debt crisis. The debt crisis occurred and Latin America had to sort itself out quickly, in order to avert a total economic collapse. They needed to adopt different tactics to save and make money and use alternative methods. The 1974 oil shock was something of a precursor to the 1982 debt crisis. Exporters of oil laid down their monies in the commercial banks of developed nations, but in 1974 when oil prices rocketed causing a recession in many of these countries, the demand on credit noticeably decreased. “Left with excessive liquidity, bankers eagerly lent to the third world” (Cardoso & Helwege. 1997. p116). Latin American nations were persuaded to borrow by commercial banks and foreign governments. As the 1980s showed, Latin America overborrowed. Banks were wrong to lend out so much money and Latin America was wrong to borrow so much, but both parties seemed sure that it was a good idea, in the 1970s in particular.

“The inflationary climate that preceded the debt crisis (…) was brought on by the instability of the international monetary system after the breakdown of a disciplined international monetary order anchored to gold in 1971” (Brock & Connolly et al. 1989. p10). Before 1971, the global currency exchange and valuation system in use was the Bretton-Woods, which was intrinsically linked with gold and its value. The Bretton-Woods collapsed in 1971 when US president Nixon decided to halt gold convertibility. At first it was replaced with the Smithsonian agreement, but this did not last long and then other world currencies were left to float against the dollar. As a result, currency was more reactive to inflationary pressures and price changes of certain other major commodities such as oil and international monetary stability and discipline was weakened (Brock & Connolly et al. 1989. p10).

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“When U.S. monetary policy tightened in 1981 everything changed” (Brock & Connolly et al. 1989. p10). In 1981, the US drastically decided to try to sure up its system, in order to stabilise itself and provide a solution to growing debts. Interest rates were put up in the US and this coupled with a deep recession in 1982, proved to be too much for borrowers from many less economically developed countries to take. Higher interest rates meant that repayments for the loans that Latin American countries took out, would dramatically increase, with governments not being able to meet payment targets ...

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