Why developing countries should not incur foreign debt: the Brazilian experience

Luiz Carlos Bresser-Pereira (bresserpereira@gmail.com) and Thiago de Moraes Moreira

No 427, Textos para discussão from FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil)

Abstract: What we should learn from foreign debt is, essentially, that developing countries should not get indebted in foreign money. Not only because foreign debt leads countries cyclically to balance of payment financial crises and are constrained to long and painful restructuring. Principally because, contrary to conventional wisdom, the current account deficits and its financing, even if made by foreign direct investments, in most cases do not promote but hinder economic growth, in so far that they incite consumption, not investment. Something often forgotten is that to a current account deficits corresponds an overvalued currency, which makes the business enterprises in the country utilizing technology in the world state of the art non competitive, and, so, discourages investment. In consequence, we observe in developing countries a high rate of substitution of foreign for domestic savings. Instead of recurring to foreign indebtedness, developing countries should develop domestic financial institutions to finance investment

Date: 2016
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