Document Type

Conference Paper

Publication Date

1991

First Page

1

Last Page

26

Keywords

External debt, Asian countries, Debt crisis

Abstract / Description

In the development economics literature, there is a general consensus that the less developed countries will normally incur current account deficits and remain structural capital importers until they emerge from underdevelopment. It is also true that the bulk of the financing of these deficits would be provided by net capital inflows that give rise to external indebtedness. After all, that is how most of the developed countries of today achieved their growth. So, there is nothing intrinsically wrong with external borrowing per se. The crucial question is how best should developing countries manage external debt without plunging themselves into a crisis? This is by no means an easy task as it involves some important trade-offs that balance the positive effect of external borrowing with its adverse affect on debt accumulation. The link between borrowing and growth is quite complex. On the one hand, external financing enables the borrowing country to achieve higher levels of imports and investment than can be warranted by domestic savings alone. On the other hand, to be able to fully service the debt when it falls due, the borrowing countries should have generated reasonably high growth and in turn trade and saving surpluses. If this link between higher levels of imports and investment does not transmit itself into high growth in income and exports then the borrowing countries face serious difficulties. Most of the academic and popular discussion in recent years has exclusively focussed on the origin and factors contributing to the debt crisis, the behavior and responses of highly indebted countries in Latin America and Africa, the bargaining between these countries and their creditors and the impact of debt overhang on the economic conditions of these countries. Very little has been said about the 60 countries or so that were able to avoid plunging into this crisis and able to strike the trade-offs required. This paper attempts to fill this gap in the literature and reviews the experience of external debt management of Asian developing countries during the past twenty years, compares this with the highly indebted countries and draws some lessons for enhancing our understanding of the management of external debt.

Comments

A World Bank paper by Ishrat Husain, Chief, Debt and International Finance Division, World Bank. The views expressed are those of the author's and should not be attributed to the World Bank, its Board of Directors, its management, or any of its member countries. IH0234

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