Developing countries' debt problems and growth prospects

Abstract

The past five years have witnessed a large number of events in the international economy of unprecedented magnitude and importance. To name just a few: the worldwide recession of 1980-83 was deeper and longer than any since the Second World War; real primary commodity prices reached their lowest levels since the Great Depression; real interest rates attained unprecedented levels; the world's most important and presumably most stable currency appreciated 50 percent in five years in real terms; and the drop in the rate of inflation exceeded even the most optimistic expectations of policy makers and economists. In the midst of all this, the debt crisis of the developing countries increased anxieties and uncertainties about the international financial system. Partly because so many events were occurring simultaneously, and partly because initial focus was on the immediate liquidity problems of large borrowers, it was perhaps natural to assume that the debt crisis would be resolved as the worldwide recession abated. Initially, therefore, little attention was paid to the impact of the debt problem on the longerterm growth prospects of the developing countries. And, indeed, until the initial crisis phase was successfully passed, the longer term issues could not be addressed. Now, however, seems to be an appropriate time to examine the longer-term aspects of the debt problem. The upswing in the international economy began in 1983, and proceeded at a healthy pace through 1984. Even if there were no concerns as to the sustainability of the recovery, it is already apparent