The Macroeconomics of Commodities, Oil and Debt

Abstract

Debt has been the cause of the most serious problems faced by the developing world during the 1980s and there does not appear to be any prospect that these problems will be resolved in the immediate future. The sharp jump in both nominal and real interest rates in the 1980s, taken in conjunction with real primary commodity prices which have been at postwar lows, have meant that indebted countries have been obligated to pay a very large proportion of their foreign exchange earnings to banks, governments or multilateral agencies. In the great majority of cases countries have been either unable or unwilling to honour these contractual commitments and threatened default has resulted in rescheduling. This has naturally reduced the new funds available for development in the LDCs which has restricted their growth. In particular, it has implied that projects with high returns are not being undertaken in the LDCs while projects with much lower returns are routinely undertaken in the developed countries. This paper proposes a model for examining those issues and their implications both for development planning and for international policy on debt. The model has both forecasting and policy aspects.