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Public debt in developing countries : has the market-based model worked (English)

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.

Details

  • Author

    Gill,Indermit S., Pinto,Brian R.

  • Document Date

    2005/08/01

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS3674

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    World,

  • Region

    The World Region,

  • Disclosure Date

    2010/07/01

  • Disclosure Status

    Disclosed

  • Doc Name

    Public debt in developing countries : has the market-based model worked?

  • Keywords

    public debt;Poverty Reduction & Economic Management;Stability and Growth Pact;Mauritius Automated Clearance and Settlement System;capital flow;marginal product of capital;fiscal deficit;marginal return to capital;high real interest rate;balance of payment crisis;real exchange rate appreciation;sovereign debt restructuring mechanism;public investment in infrastructure;implicit exchange rate guarantee;present value of debt;present value of taxes;per capita growth rate;fixed exchange rate regime;competitive real exchange rate;composition of government spending;law of diminishing return;enforcement of property right;fixed exchange rate peg;total public debt;Public and Publicly Guaranteed;rate of productivity growth;infrastructure spending;debt crisis;international capital market;contingent liability;contingent liabilities;neoclassical growth theory;normal cyclical fluctuation;Macroeconomic Policy;returns to capital;liberalization of capital;highly indebted country;public debt dynamics;world interest rate;Endogenous Growth Theories;gross public debt;flexible exchange rate;private capital flow;nominal exchange rate;Exchange Rates;currency mismatch;macroeconomic crisis;output volatility;primary deficit;long gestation period;runs on bank;volatility of debt;cost of fund;impact of volatility;business cycle volatility;public external debt;local currency debt;enterprise budget constraint;long-term local currency;high oil price;interest rate increases;international financial architecture;public infrastructure investment;economic policy changes;external public debt;interest rate fluctuation;private external debt;Foreign Exchange Reserve;explicit public debt;government net worth;hard budget constraint;political economy approach;competing interest group;real estate development;political economy considerations;regulation of infrastructure;soft budget constraint;allocation of saving;domestic public debt;financial system crisis;high public debt;domestic financial intermediation;share of capital;external capital flows;international financial market;global capital market;political economy factor;exchange rate change;international capital mobility;movement of capital;per capita consumption;capital market imperfection;world economic;external debt crisis;public investment program;lower interest rate;emerging market currency;international debt market;international financial institution;source of financing;black market premium;perfect capital mobility;current account deficit;international debt crisis;primary fiscal balances;asset and liability;domestic capital stock;total factor productivity;foreign private capital;foreign currency reserve;world financial market;supervision of bank;high inflation;debt intolerance;Financial Sector;discount rate;fiscal policy;fiscal space;Fiscal policies;External Finance;

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Citation

Gill,Indermit S. Pinto,Brian R.

Public debt in developing countries : has the market-based model worked (English). Policy, Research working paper ; no. WPS 3674 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/837121468140047761/Public-debt-in-developing-countries-has-the-market-based-model-worked