Public Debt in Developing Countries : Has the Market-Based Model Worked?

Over the past 25 years, significant levels of public debt and external finance are more likely to have enhanced macroeconomic vulnerability than economic growth in developing countries. This applies not just to countries with a history of high inflation and past default, but also to those in East Asia, with a long tradition of prudent macroeconomic policies and rapid growth. The authors examine why with the help of a conceptual framework drawn from the growth, capital flows, and crisis literature for developing countries with access to the international capital markets (market access countries or MACs). They find that, while the chances of another generalized debt crisis have receded since the turbulence of the late 1990s, sovereign debt is indeed constraining growth in MACs, especially those with debt sustainability problems. Several prominent MACs have sought to address the debt and external finance problem by generating large primary fiscal surpluses, switching to flexible exchange rates, and reforming fiscal and financial institutions. Such country-led initiatives completely dominate attempts to overhaul the international financial architecture or launch new lending instruments, which have so far met with little success. While the initial results of the countries' initiatives have been encouraging, serious questions remain about the viability of the model of market-based external development finance. Beyond crisis resolution, which has received attention in the form of the sovereign debt restructuring mechanism, the international financial institutions may need to ramp up their role as providers of stable long-run development finance to MACs instead of exiting from them.

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Bibliographic Details
Main Authors: Pinto, Brian, Gill, Indermit
Language:English
Published: World Bank, Washington, DC 2005-08
Subjects:AGENCY PROBLEMS, BALANCE OF PAYMENTS, BALANCE SHEET, BANK FOR INTERNATIONAL SETTLEMENTS, BONDS, BORROWING, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUDGET DEFICITS, BUSINESS CYCLE, CAPITAL BASE, CAPITAL FLIGHT, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITAL MARKETS, CAPITAL MOBILITY, CENTRAL BANK, COMPETITIVENESS, CONCEPTUAL FRAMEWORK, CONSTANT RETURNS TO SCALE, CONTINGENT LIABILITIES, CONVERGENCE HYPOTHESIS, COUNTER-CYCLICAL POLICIES, CROWDING OUT, CURRENCY RISK, CURRENT ACCOUNT, DEBT INSTRUMENTS, DEBT RATIOS, DEBT RESTRUCTURING, DEBT/GDP RATIOS, DEFAULT RISK, DEFICITS, DEVALUATION, DEVELOPING COUNTRIES, DEVELOPING COUNTRY, DIMINISHING RETURNS, DISCOUNT RATE, DOMESTIC POLICIES, ECONOMIC GROWTH, ECONOMIC OUTLOOK, ECONOMIC RATE OF RETURN, ECONOMISTS, ELECTRICITY, EMPIRICAL EVIDENCE, EQUILIBRIUM, EXCHANGE RATE, EXCHANGE RATE REGIME, EXCHANGE RATES, EXTERNAL BORROWING, EXTERNAL DEBT, EXTERNALITIES, FINANCIAL INSTITUTIONS, FINANCIAL INTEGRATION, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL OPENNESS, FINANCIAL POLICIES, FINANCIAL SECTOR, FINANCIAL SECTORS, FINANCIAL SYSTEM, FISCAL BALANCE, FISCAL DEFICITS, FISCAL POLICIES, FISCAL POLICY, FOREIGN CURRENCY, FOREIGN EXCHANGE, FOREIGN EXCHANGE RESERVES, GDP, GNP, GOVERNMENT DEBT, GOVERNMENT SPENDING, GROWTH, GROWTH PACT, GROWTH POTENTIAL, GROWTH RATE, GROWTH THEORY, HARD BUDGET CONSTRAINTS, HIGH INFLATION, HUMAN CAPITAL, IMPLICIT EXCHANGE RATE GUARANTEES, INDEXATION, INFLATION, INFLATION TARGETS, INFLATION TAX, INSTITUTIONAL DEVELOPMENT, INSURANCE, INTEREST RATE, INTEREST RATES, INVESTMENT OPPORTUNITIES, LABOR FORCE, LIQUIDITY, LOCAL CURRENCY, LONG-RUN GROWTH, MACROECONOMIC CRISIS, MACROECONOMIC ENVIRONMENT, MACROECONOMIC FACTORS, MACROECONOMIC FRAMEWORK, MACROECONOMIC LITERATURE, MACROECONOMIC POLICIES, MACROECONOMIC POLICY, MACROECONOMIC STABILITY, MARGINAL COST, MARGINAL PRODUCT, MICRO FOUNDATIONS, MIDDLE INCOME COUNTRIES, MORAL HAZARD, NET DEBT, NETWORK EXTERNALITIES, OUTPUT VOLATILITY, OVERVALUATION, POLICY RESEARCH, POLITICAL ECONOMY, PORTFOLIO ALLOCATIONS, POVERTY REDUCTION, POWER PLANTS, PRESENT VALUE, PRESENT VALUE OF DEBT, PRIMARY DEFICIT, PRIMARY DEFICITS, PRIVATE INVESTMENT, PRIVATE SECTOR, PRODUCTIVITY, PRODUCTIVITY GROWTH, PROPERTY RIGHTS, PUBLIC DEBT, PUBLIC GOODS, PUBLIC INFRASTRUCTURE, PUBLIC INVESTMENT, PUBLIC INVESTMENT IN INFRASTRUCTURE, PUBLIC INVESTMENT PROGRAMS, PUBLIC INVESTMENTS, PUBLIC SECTOR, PUBLIC SPENDING, REAL EXCHANGE, REAL EXCHANGE RATE, REAL GDP, REAL INCOME, REAL INTEREST, REAL INTEREST RATES, REDISTRIBUTIVE TAXATION, RESERVE REQUIREMENTS, REVENUE MOBILIZATION, SAVINGS, SOFT BUDGET CONSTRAINTS, SOVEREIGN RISK, STABILIZATION PROGRAM, STANDARD DEVIATION, SUSTAINED GROWTH, TAX, TAX RATES, TAXATION, TECHNOLOGICAL PROGRESS, THEORETICAL MODELS, TOTAL FACTOR PRODUCTIVITY, TRANSACTIONS COSTS, USER CHARGES, VOLATILITY,
Online Access:http://documents.worldbank.org/curated/en/2005/08/6133225/public-debt-developing-countries-market-based-model-worked
https://hdl.handle.net/10986/8632
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