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Economic Development of Central America Econ. 4200 - Spring 2004 – Dr. Taylor - page 23 / 153

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- Still the strategy failed to resolve the Latin American tendency to import more than it could export.

- In fact the import strategy contributed to the problem because the new factories were dependent on foreign suppliers for machines, spare parts and intermediate products.

- As the policy ran its course, domestic markets became exhausted...if economic growth was to be sustained at home, then foreign debts had to be incurred (Cent. Am. perennial interest in trade arrangements: bigger markets).

Eventually, many developing nations faced a breakdown… (run out of loans and must  reduce exchange rates).

- When this occurred the wealthy and powerful were the first to know:  domestic currency will exchange into a larger number of foreign currency per unit. Economic reality => the national currency must depreciate => Capital flight: Causes the domestic currency to depreciate rapidly.

- Devaluation typically reduces imports and increases exports but in the import trade strategy environment, the dependency on imported goods made the demand for foreign goods inelastic.

=> Imports did not fall yet became more expensive to obtain.

=> Also, reducing imports would mean reduced employment (politically unacceptable).

=> Worsen the balance of payments/foreign exchange problem (plus undermine populist politics).

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