World Bank Document

Box 4.1
(continued)
trade deficits. In the 1980s, many of these same countries
have been moved to the third, or early creditor, stage,
reducing net debt by running huge trade surpluses. This
development is, of course, the mirror image of what has
occurred in some industrial countries. For example, in
terms of the debt cycle hypothesis, the United States
recently reentered the early debtor stage of the debt
cycle, incurring debt at an accelerating rate while increas-
ing its trade deficits. The reasons for these shifts are
complex and are explored in the Report.
teenth year, growth rates of exports and GDP, as well as
the debt ratios, settle down to their long-run sustainable
levels. Export growth has risen to 6 percent, which is
sufficient to sustain continued current account deficits
and steadily growing debt.
Sudden shifts in major economic variables, as have
occurred with particular force in the past decade, often
lead to major departures from the predicted path. During
the latter half of the 1970s, many developing countries
thought to be mature debtors reverted to the early
debtor stage, importing capital and running mounting
Box table 4.1A Sustainable growth of debt: a hypothetical case
(average annual percent, unless otherwise noted)
1st to 6th to l1th to 16th to 2Ist to
Variable 5th years 10th years 15th years 20th years 30th years
Interest rate 3.75 3.75 3.75 3.75 3.75
Growth of
exports 3.0 3.0 14.1 6.0 6.0
Growth of GDP 6.2 7.4 6.4 6.0 6.0
Current account
deficit/GDP 2.1 6.4 3.9 2.4 2.4
Debt service/
exports 2.1 17.5 32.0 31.0 31.0
DebtlGDP 4.6 24.0 42.0 42.0 42.0
Debt at end of
period (millions
of dollars) 16.5 103.0 210.0 280.0 530.0
Note: Calculations are based on a simulation model that makes the following assumptions: incremental capital output ratio 3.5; consumption = 80
percent of GDP; import elasticity = 1.0; Maturity of debt = 12 years. Growth rates and interest rates are expressed in real terms.
period, some countries that borrowed heavily ing, investment, and growth highlights the impergrew
slowly or not at all. In some instances-such ative of using all capital efficiently. Public sector
as Peru and Zambia-slow growth was associated investments require careful appraisal, taking reawith
stagnant investment ratios; foreign capital sonable precautions for downside risks. Private
was being used to cover balance of payments defi- sector projects need a framework of incentivescits
caused by unsustainable macroeconomic poli- rewards and penalties-which encourage efficient
cies and falling commodity prices. In other coun- investment. Failure in these two areas has been a
tries-mainly in Africa-substantial capital inflows primary cause of slow growth in some countries in
helped to raise investment rates, but the invest- the past decade (see Box 4.3).
ments themselves were often inefficient. Nonethe- Where foreign capital is involved, countries can
less, countries such as India (see Box 4.2), Indone- run into a "transformation problem"-that is, the
sia, and Korea achieved moderate or even very projects fail to generate (or save) enough foreign
high growth rates without raising their borrowing exchange to service the foreign debt. This can haprates.
Finally, in 1979-83, the relationship between pen for several reasons. Project gestation periods
changes in debt to GDP and growth of GDP was may be mismatched with the maturity profile of
negative. In an environment of rising real interest the loans-an issue of portfolio management that
rates and contracting world economic output, will be discussed in the next chapter. Alternatively,
increased borrowing no longer translated into certain projects may never be able to generate or
higher growth. Again, however, the experience is save sufficient foreign exchange over any time
not uniform for all countries. Malaysia, for exam- period. That would not matter in an economy
ple, borrowed heavily, but also achieved impres- undistorted by overvalued exchange rates, high
sive growth.
protection, and consumption and investment sub-
The range of country experiences with borrow- sidies. Whether investments produced traded
48