DP461 | Slow Growth and Large LDC Debt in the Eighties: An Empirical Analysis

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01/01/1991

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Abstract

This paper aims to disentangle the correlation between LDC debt and growth in the 1980s. We show that large debt was not an unconditional predictor of slow growth in the eighties and that investment was not abnormally low, when compared with a `financial autarky' rate, calculated in the text. We do find, however, that debt service crowded out investment. For the rescheduling countries we show that 1% of GDP paid abroad reduced domestic investment by 0.3% of GDP. This is shown to be consistent with the prediction of the theoretical model presented in the text, and identical to the correlation between investment and foreign finance observed in the 1960s.