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The adjustment towards national solvency in developing countries: An application to india

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  • Subrata Ghatak
  • Paul Levine

Abstract

We use a small macro model of the Indian economy to examine the cost of the adjustment required to secure national solvency. This is compared with the corresponding cost if India were to repudiate its debts and experience financial autarky as a consequence. Our empirical results suggest that a small drop in the trend growth rate, resulting from a loss of foreign investment and lending to the domestic sector, is sufficient to deter reneging, but only if the government is sufficiently far-sighted and chooses a discount rate of 5% (or less) a year. If the Indian government were to discount at a rate of 10% per annum, the drop in trend growth of as much as 4% is insufficient to deter reneging. Debt relief generally improves the relative attractiveness of debt repayment. With a 10% discount rate, however, even writing off 75% of India's external debt fails to make debt repayment incentive-compatible.
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Suggested Citation

  • Subrata Ghatak & Paul Levine, 1994. "The adjustment towards national solvency in developing countries: An application to india," Journal of International Development, John Wiley & Sons, Ltd., vol. 6(4), pages 399-414, July.
  • Handle: RePEc:wly:jintdv:v:6:y:1994:i:4:p:399-414
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    1. Lykke Andersen & Marcelo Cardona, 2013. "Building Resilience against Adverse Shocks: What are the determinants of vulnerability and resilience?," Development Research Working Paper Series 02/2013, Institute for Advanced Development Studies.
    2. Andersen, Lykke E. & Suxo, Addy & Verner, Dorte, 2009. "Social impacts of climate change in Peru : a district level analysis of the effects of recent and future climate change on human development and inequality," Policy Research Working Paper Series 5091, The World Bank.
    3. Dorte Verner, 2012. "Adaptation to a Changing Climate in the Arab Countries : A Case for Adaptation Governance and Leadership in Building Climate Resilience," World Bank Publications, The World Bank, number 12216.
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    More about this item

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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