Did the debt crisis cause the investment crisis?
There is now a large literature which attributes the investment decline in heavily indebted developing countries to the effects of the international debt crisis which began in 1982. However, these theories have not been tested against the alternative that declining terms of trade and high world real interest rates in the early 1980s directly caused the investment declines. This paper is based on the idea that if the debt theories are true, then forecasts of investment in the 1980s which do not use debt variables should not perform very well. This paper points out that such forecasts perform surprisingly well, and in many cases go against the predictions of the debt theories, casting doubt on the validity of the debt theories.
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