Growth implosions, debt explosions, and my Aunt Marilyn: do growth slowdowns cause public debt crises?

William Easterly ()

No 2531, Policy Research Working Paper Series from The World Bank

Abstract: The worldwide slowdown in growth after 1975 was a major negative fiscal shock. Slower growth lowers the present value of tax revenues and primary surpluses and thus makes a given level of debt more burdensome. Most countries failed to adjust to the negative fiscal consequences of the growth implosion, so public-debt-to-GDP ratios exploded. The growth slowdown therefore played an important role in the debt crisis of the middle-income countries in the 1980s, the crisis of the heavily indebted poor countries (HIPCs) in the 1980s and 1990s, and the increased public debt burden of the industrial countries in the 1980s and 1990s. Moreover, the HIPCs'debt problems were worse than elsewhere because, as a result of poor policies, these countries grew more slowly after 1975 than other low-income countries. Econometric tests and fiscal solvency accounting confirm the important role of growth in debt crises.

Keywords: Economic Theory&Research; Strategic Debt Management; Environmental Economics&Policies; Economic Conditions and Volatility; Macroeconomic Management (search for similar items in EconPapers)
Date: 2001-01-31
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