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Resolving the Debt Crisis of Low-Income Countries. Poverty Traps and the
Debt Overhang One key hypothesis of this paper is that poor ...
... Historical background The debt crisis some poor countries are ... is being used effectively
in resolving the borrower's ... only do they get their debt repaid, "but ...
... government decides to reduce external debt by about ... disappeared, pointing to an emerging
urban poverty crisis. ... the reliable way forward in resolving the twin ...
... government decides to reduce external debt by about ... disappeared, pointing to an emerging
urban poverty crisis. ... the reliable way forward in resolving the twin ...
... They provide assistance for resolving many of the conventional ... Even more interestingly,
Northwest's debt ratio rose above 100 ... emerged from the 9/11 crisis in a ...
Submitted by jiayan84 on January 9, 2008
Category: Miscellaneous
Words: 741 | Pages: 3
Views: 118
Popularity Rank: 91,094
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Poverty Traps and the Debt Overhang
One key hypothesis of this paper is that poor countries are vulnerable
to a poverty trap, which can be caused or exacerbated by an excessive foreign
debt burden. The basic idea of a poverty trap is that nonlinearities in
saving, investment, and production can lead some low-income countries
to remain stuck at low or even falling levels of GNP per capita, despite the
forces of economic convergence that are also at play in the world economy,
such as the potential for capital inflows into capital-scarce countries
and the diffusion of technology from rich to poor countries. To illustrate
the key ideas, I introduce a very simple model in which the net saving rate
falls to zero when income drops below a minimum subsistence level.12
Suppose that individuals require a level of minimum real consumption
m to meet basic needs of personal health and hygiene, food intake, and
shelter. (Unless otherwise noted, all variables are in per capita terms.)
The overhang of unpayable debt, and still more, the buildup
of new debt if aid comes in the form of loans rather than grants, would
convince potential private sector investors that the country remains
trapped. Creditors themselves might promise their help now only to insist
on increased debt service payments in the future if the country starts to
recover. These are among the classic arguments for why a fresh start
rather than a simple postponement of debt is needed in the case of an
insolvent individual or municipality.
What kind of institutional changes are required to reorient the international
system in the recommended direction? I suggest the following:
—The creditors should understand that, in a sovereign insolvency,
whether under Chapter 9 in the United States or an international sovereign
insolvency,...
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