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Public Debt and Social Expenditure: Friends or Foes?

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  • Eduardo Lora
  • Mauricio Olivera

Abstract

This paper assesses the effects of total public debt (external and domestic) on social expenditure worldwide and in Latin America using an unbalanced panel of around 50 countries for the period 1985-2003. The most robust and important finding is that higher debt ratios do reduce social expenditures, as popular opinion holds. Debt displaces social expenditures not so much because it raises the debt burden, but because it reduces the room (or the appetite) for further indebtedness. Loans from multilateral organizations like the World Bank or the Inter-American Development Bank do not seem to ameliorate the adverse consequences of debt on social expenditures. In accordance with popular wisdom, our results indicate that defaulting on debt obligations does help to increase social expenditures. The main policy implication is that there is no better way to protect social expenditures than to avoid over-indebtedness, especially in Latin America.

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Bibliographic Info

Paper provided by Inter-American Development Bank in its series IDB Publications with number 43578.

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Date of creation: May 2006
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Handle: RePEc:idb:brikps:43578

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Keywords: Economic Development & Growth; Fiscal Policy; Social Policy & Protection; public debt; social expenditure; debt burden; interest payments; international financial institutions; external debt; default;

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  1. Mahdavi, Saeid, 2004. "Shifts in the Composition of Government Spending in Response to External Debt Burden," World Development, Elsevier, Elsevier, vol. 32(7), pages 1139-1157, July.
  2. Ugo Panizza & Eduardo Levy Yeyati, 2006. "The Elusive Costs of Sovereign Defaults," IDB Publications, Inter-American Development Bank 6713, Inter-American Development Bank.
  3. Dany Jaimovich & Ugo Panizza, 2010. "Public debt around the world: a new data set of central government debt," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 17(1), pages 19-24.
  4. Ritha S. Khemani & Sanjeev Gupta & Calvin A. McDonald & Louis Dicks-Mireaux & Marijn Verhoeven, 2000. "Social Issues in IMF-Supported Programs," IMF Occasional Papers, International Monetary Fund 191, International Monetary Fund.
  5. Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, Elsevier, vol. 69(2), pages 263-279, June.
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