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Fiscal aspects of developing countrydebt problems and debt and debt-service reduction operations : a conceptual framework

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  • Montiel, Peter J.

Abstract

The causes and implications of the developing country debt crisis - as well as its solution - all have an important fiscal dimension. The crisis was triggered by the widespread perception that the public sectors in many heavily indebted countries were effectively insolvent in the international environment of the early 1980s. The actual fiscal response to the resulting liquidity crisis involved increased reliance on domestic financing, the inflation tax, and the curtailment of public investment. This created adverse adjustment incentives for policymakers and resulted in credit rationing, capital flight, assumption of private external claims by the public sector, and poor domestic investment performance. Solutions involve restoring fiscal health through a combination of debt relief and efficient fiscal adjustment, aimed at mitigating the burden associated with public sector debt service and minimizing the liquidity problems facing the indebted public sector. The debt and debt-service reduction (DDSR) programs implemented so far under the Brady Plan have provided only partial solutions, closing without eliminating the gap between the face value of the external debt and the present value of prospective public sector debt service. They have done so partly by reducing the former and partly by increasing the latter. Their contribution toward easing the immediate liquidity problems of the debtors has not been encouraging. The amount of debt relief embodied in Brady Plan programs enacted so far has not in itself been sufficient to restore fiscal solvency. Better-quality fiscal adjustment could greatly help improve the situation. The most important potential contribution of such programs, then, may have been the reduction - through the policy conditionality associated with resources provided by the international financial institutions - of the secondary burden associated with the internal transfer of resources to the public sector.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1073.

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Date of creation: 31 Jan 1993
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Handle: RePEc:wbk:wbrwps:1073

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Keywords: Banks&Banking Reform; Public Sector Economics&Finance; Environmental Economics&Policies; Economic Theory&Research; Strategic Debt Management;

References

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  1. Easterly, William R., 1989. "Fiscal adjustment and deficit financing during the debt crisis," Policy Research Working Paper Series 138, The World Bank.
  2. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
  3. Schmidt-Hebbel, Klaus & Marshall, Jorge, 1991. "Macroeconomics of public sector deficits : the case of Chile," Policy Research Working Paper Series 696, The World Bank.
  4. Rodrik, Dani, 1991. "Policy uncertainty and private investment in developing countries," Journal of Development Economics, Elsevier, vol. 36(2), pages 229-242, October.
  5. Manmohan S. Kumar & Pablo Emilio Guidotti, 1991. "Domestic Public Debt of Externally Indebted Countries," IMF Occasional Papers 80, International Monetary Fund.
  6. Michael Dooley & Mark R. Stone, 1993. "Endogenous Creditor Seniority and External Debt Values," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 395-413, June.
  7. Fernandez-Arias, Eduardo, 1993. "Costs and benefits of debt and debt service reduction," Policy Research Working Paper Series 1169, The World Bank.
  8. Ul Haque, Nadeem & Montiel, Peter J., 1990. "How mobile is capital in developing countries?," Economics Letters, Elsevier, vol. 33(4), pages 359-362, August.
  9. Cohen Daniel, 1990. "Slow growth and large ldc debt in the eighties : an empirical analysis," CEPREMAP Working Papers (Couverture Orange) 9002, CEPREMAP.
  10. Rodriguez, Carlos Alfredo, 1991. "The macroeconomics of the public sector deficit : the case of Argentina," Policy Research Working Paper Series 632, The World Bank.
  11. Easterly, William & Schmidt-Hebbel, Klaus, 1991. "The macroeconomics of public sector deficits : a synthesis," Policy Research Working Paper Series 775, The World Bank.
  12. Claessens, Stijn & Diwan, Ishac & Fernandez-Arias, Eduardo, 1992. "Recent experience with commercial bank debt reduction," Policy Research Working Paper Series 995, The World Bank.
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Cited by:
  1. Goldstein, Morris, 1995. "Coping with too much of a good thing : policy responses for large capital inflows in developing countries," Policy Research Working Paper Series 1507, The World Bank.

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