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