Public debt and social expenditure: Friends or foes?
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. This effect comes mostly from the stock of debt and not from debt service payments, indicating that 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. Nonetheless, Latin America is different in some respects. The adverse effects of debt and debt-interest payments are significantly stronger in the region, which makes defaults more beneficial to social expenditures. While many of these conclusions are very heterodox, their main policy implication is not; there is no better way to protect social expenditures than to avoid overindebtedness, especially in Latin America.
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- Mauro, Paolo, 1998. "Corruption and the composition of government expenditure," Journal of Public Economics, Elsevier, vol. 69(2), pages 263-279, June.
- Ritha S. Khemani & Sanjeev Gupta & Calvin A McDonald & Louis Dicks-Mireaux & Marijn Verhoeven, 2000. "Social Issues in IMF-Supported Programs," IMF Occasional Papers 191, International Monetary Fund.
- Gupta, Sanjeev, 2000. "Social issues in IMF: supported programs," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34725, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
- Ugo Panizza & Eduardo Levy Yeyati, 2006.
"The Elusive Costs of Sovereign Defaults,"
Research Department Publications
4485, Inter-American Development Bank, Research Department.
- Dany Jaimovich & Ugo Panizza, 2006.
"Public Debt around the World: A New Dataset of Central Government Debt,"
IDB Publications (Working Papers)
6710, Inter-American Development Bank.
- Dany Jaimovich & Ugo Panizza, 2010. "Public debt around the world: a new data set of central government debt," Applied Economics Letters, Taylor & Francis Journals, vol. 17(1), pages 19-24, January.
- Dany Jaimovich & Ugo Panizza, 2006. "Public Debt around the World: A New Dataset of Central Government Debt," Research Department Publications 4461, Inter-American Development Bank, Research Department.
- Mahdavi, Saeid, 2004. "Shifts in the Composition of Government Spending in Response to External Debt Burden," World Development, Elsevier, vol. 32(7), pages 1139-1157, July.
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