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Development and foreign debt: The stylized facts 1970-2006

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  • Martin Paldam

    () (School of Economics and Management, University of Aarhus, Denmark)

Abstract

The paper uses the data from the incomplete debt cycle for the LDC world from 1970 onwards to tell the typical story of debt. Two debt stories are contrasted: A good debt story: Here countries borrow and invest wisely, so that they grow more. A bad debt story: Here countries borrow when they are in crisis, and the debt grows and generates low growth in the next couple of decades. The analysis concentrates on two relations: (R1) the relation between borrowing and growth, and (R2) the relation between initial debt and growth. Both relations are negative, so essentially the stylized story of debt is a story of bad debt. The paper looks in vain for non-linearities in the two relations, suggesting that the good debt story applies in some part of the range. The result thus confirms that international transfers to governments are an inefficient way to promote development.

Suggested Citation

  • Martin Paldam, 2008. "Development and foreign debt: The stylized facts 1970-2006," Economics Working Papers 2008-10, Department of Economics and Business Economics, Aarhus University.
  • Handle: RePEc:aah:aarhec:2008-10
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    File URL: ftp://ftp.econ.au.dk/afn/wp/08/wp08_10.pdf
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    Keywords

    International borrowing and debt; economic development;

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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