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Public debt and social expenditure: Friends or foes?

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  • Lora, Eduardo
  • Olivera, Mauricio

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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Suggested Citation

  • Lora, Eduardo & Olivera, Mauricio, 2007. "Public debt and social expenditure: Friends or foes?," Emerging Markets Review, Elsevier, vol. 8(4), pages 299-310, December.
  • Handle: RePEc:eee:ememar:v:8:y:2007:i:4:p:299-310
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    References listed on IDEAS

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    1. Yeyati, Eduardo Levy & Panizza, Ugo, 2011. "The elusive costs of sovereign defaults," Journal of Development Economics, Elsevier, pages 95-105.
    2. 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.
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    12. 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.
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