The Countries That Were Hardest Hit In The Oil Crisis Essay, Research Paper

The countries that were hardest hit in the immediate aftermath of the oil crisis have made the best long-term adjustments to the oil shocks Refute this statement with examples.

+ How were Argentina and Brazil doing pre shock?

For this presentation we have chosen to refute that the countries that were hardest hit in the immediate aftermath of the oil crisis have made the best long-term adjustments to the oil shocks. Considering the data, which was available to us, we have chosen Argentina and Brazil to refute this statement as the evidence shows that both these countries were amongst those hardest hit.

At the start of the 19th century, South American countries started to borrow large sums of money from abroad. After the second world war, this borrowing increased substantially as these countries found it all too easy to keep on borrowing money instead of trying to find where the majority of this money was going to, as much of it was unaccounted for. In addition, this foreign borrowing also masked the need for domestic economic restructuring.

Both the political and industrial power was to be found in the hands of either the military or large, wealthy families. Therefore, a large proportion of this foreign borrowing was spent on the military or put into the hands of corrupt upper class families instead of fuelling the poorly developing economy. There were flows of foreign capital (in the form of investments, not loans) into these countries but again, this money, because of the high level of corruption, was rarely seen by those people who needed it. Thus the high level of corruption prevented any benefits either through loans or profit, from benefiting the working class through higher wages, improved health and education. (It should be noted that the working class constituted the majority of the population in both Argentina and Brazil). At the same time, there was a huge increase in the drug trade which had its trade routes and sources of finance mainly in Argentina and Brazil.

In addition, the South American industries were not growing and developing mainly due to five reasons: Firstly, the ruling class opposed tariffs and quotas which small industries needed but which rich customers did not want. Secondly, the several domestic markets were too small and attempts to combine them rudimentary. Thirdly, industries tended to produce too much at too high a cost. Fourthly, the technology was either local and behind or foreign and thus expensive. Lastly, transport and other public services were poor or non-existent except near large cities. In sum then, the Argentinean and Brazilian economies were prevented from flourishing.

The stagnation in the development of industries and the lack of finance and technology, meant that neither of these countries were able to take advantage of their rich supply of minerals, including oil . This meant that both these countries were forced into the position of net oil importers and were largely dependent on supply from the Middle East.

Argentina and Brazils situation before the first oil shock was unhealthy to say the least. With half the population being officially described as poor, an increase in foreign debt, a breakdown in industries, and hyperinflation, neither Argentina nor Brazil was prepared for the oil crisis of 1973.

+ How were Argentina and Brazil hardest hit by the Oil shocks?

The above situation can only be underlined by the difficulty we had in trying to find reliable statistics for this presentation. This unemployment table shows the percentage of unemployment for all Latin American countries from 1952 till 1972.

(show chart)

As you can see there are only a handful of figures. In addition, in a later volume of one of the statistical books we used (show page), there was further evidence of governments with-holding information during this time.

The lack of essential statistics determining how these countries were doing, meant that the governments of Argentina and Brazil were not fully aware of the degenerative condition of their economy. This fact, coupled with the unexpected arrival of the first oil shock, meant that these governments were in no position to be able to curb the effect of the oil shock. Therefore these countries were faced with the full impact.

The immediate aftermath of the shock resulted in a substantial increase in oil prices and also the cost of living in general. After the first oil shock, governments used both financial and oil reserves to compensate for the increase in oil prices and general consumer prices. When the second oil crisis hit in 1979, these reserves had been substantially depleted which meant that governments had to increase borrowing to cover spending. This can be seen in the following chart. (Show dept graph).

There was also a staggering increase in the rate of inflation from 1980 to 1981 inflation rose by 95% in Brazil and 130% in Argentina, consumer prices rose by 105% in both countries. Before the first oil shock, these governments had investment projects, which were used to pay back the interest on pre-existing debt. During both oil shocks these investment projects did not yield enough profit to pay back the interest on the debt owed, the majority of which was from private financial institutions. To make matters worse, not only was there a large rise in the outstanding debt, the interest costs of carrying the debt increased exponentially because of the escalation of interest rates in international financial markets.

External borrowing was also substantially increased due to the weak expansion of export earnings and increased import bills. The decrease in export activity was due to the international recession as industrial countries were importing less. The increase in the import bill clearly reflected the increase in consumer prices. The oil shocks had substantial effects on the countries industrial and transport infrastructures. There was a sharp drop in manufacturing and construction activity due to increased production costs. One must keep in mind that both these developing countries still relied heavily on oil as their largest source of power for heavy industry. The geographical nature of both these countries also means that they are highly dependent on transportation, both for goods and services. For industries this lead to lower profitability, followed by either a decrease in production or an increase in the price of the product.

Naturally, for consumers this lead to an increase of the end cost of all consumer products as well as a reduction in the disposable income due to the increased cost of commuting because of increased cost of transport.

(unemployment figures to be included)

+ How come these countries have not recovered from these shocks?

The main reason why these countries have not recovered from the oil shocks is due to their large debt and also the lack of human capital. As mentioned before, they were already borrowing significant amounts of money before the first shock hit in 1973. The money which was loaned to them however was by no means enough to cover the rapidly expanding population in the lower classes and the growing poverty.

As most other developing nations, their main obstacle was the political instability, which persisted until the late 1980 s. Fraud, corruption, internal conflicts, as well as large expenditures on military and law enforcement, made any form of economic recovery nearly impossible. The lack of data in the statistical abstracts which we used underlined the lack of knowledge and clarity of governments in their financial situations.

Because the interest on these substantial debts still had to be paid back every year, there had not been enough money left over to encourage economic growth. This lead to a viscous circle. Without the ability to increase education and health and encourage substantial growth opportunities within the various industries, it would never be possible to pay back all the debt.

Since the beginning of the 1990 s however, both countries have seen a remarkable up turn in their economies. Both countries have started to go into a recovery phase since the early 1990 s thanks to improved economic policies.

+ Where are these countries now?

Argentina s real economic growth has averaged between 4%-7% and is expected to follow this trend for the next five years. The budget deficit is currently only 1% of GDP and external and domestic debt are now becoming more manageable. They still require large amounts of financial assistance however. In 1998 they receive 5.7 Billion US$ in standby financing from the IMF, World Bank and the Inter American Development Bank.

Argentina is also no longer a net importer of oil. Instead they now export almost one third of the oil they produce. Neighbouring countries Brazil, Chile and Uruguay import this oil. This drastic up turn in the national production of oil is due to two important factors. Firstly, the privatisation and restructuring of the former state oil company YPF and secondly increased private investment thanks to changes in investment law and a favourable tax regime. Some of the largest private investors currently include Pan American Energy, British Gas and Shell.

Brazil has still, by no means, recovered although it is showing market improvements. It still depends heavily on loans from funds such as the IMF which will soon announce a $30 Billion financial package for Brazil. The fact that it is still struggling with financial instability, means that their recent economic success has been severely hampered by the recent, global financial crisis. It is still a net importer of oil although this is expected to change in the next couple of years. They are also dependent on gas and coal imports.

+ In conclusion

Argentina and Brazil are slowly recovering from the effects of the two oil shocks, even though it has taken over two decades. Unless these countries sort out their high levels of fraud and corruption, the political instability of their governments, and the drug cartels, they will not be able to pay back the outstanding debt that they owe.

More importantly however, if there were to be another oil crisis (which analysts are currently forecasting) there will be a large drop in foreign investment on which both these countries are still heavily dependent. With the exception of Argentina s growing oil and mineral industries, neither of these countries have any other industries to fall back on.