BALANCE OF PAYMENTS DISTURBANCES AND THE DEBT OF THE NON-OIL LESS DEVELOPED COUNTRIES: RETROSPECT AND PROSPECT

Abstract

The paper identifies the disturbances in the balance of payments of the non-oil less developed countries responsible for the rapid growth in their external debt between 1972 and 1977. It also examines prospects for the future. It finds that the sharp growth in the current account deficits in the years 1974 and 1975 was due primarily to adverse movements in the terms of trade. But trade terms were reversed in 1976 and 1977 and the deficit was reduced. Still overall inflation, slow export growth, and large interest payments kept the deficit substantially above the 1972 and earlier levels. In part II the paper examines how the debt to GNP ratio of the LDC's could be affected by four factors: export growth, changes in real interest rates, terms of trade, and credit rationing. A model is developed which shows that certain combinations of the four factors could lead to rapid accumulation of debt relative to GNP.