Linking Social Development with the Capacity to Carry Debt: Towards an MDG‐Consistent Debt‐Sustainability Concept

Owing to concerns among low‐income countries that the new debt sustainability framework of the Bretton Woods institutions may lock them into a so‐called ‘low debt‐low growth’ scenario, the United Nations has called for a more MDG‐consistent debt‐sustainability concept. This article shows that there is a robust relationship between achieving the Millennium Development Goals and having a higher capacity to carry debt. It then discusses options for modifying the current debt‐sustainability framework, and suggests that including progress made in achieving the MDGs in determining borrowing limits would be a first step towards adopting such a concept.     

China's development loans and the threat of debt crisis in Kenya

The increased access of African countries to external capital markets has rekindled interest in growing external borrowing and placed debt sustainability at the forefront of the continent's policy agenda. In this article, we discuss the conceptual link between external loans and debt challenges. In this article, the analysis is cast in the context of new sources of loans triggered by Sino–African co‐operation. The article examines the main sectors targeted for financing in Kenya, how the Chinese‐funded projects have been structured, the financial models adopted to deliver on the projects, and the overall gains from such projects. Ultimately, the article examines the external debt situation in Kenya and how Chinese loans are likely to precipitate a crisis of sustainability. The analysis shows that, although the external financial support plays a critical role in addressing the gap in Kenya's infrastructure development, the loans also pose risks of debt sustainability in the longer term, Chinese loans particularly are tied and lack transparency. The emerging debt challenges point to the need for policy reforms in favour of enhancing loans transparency and the beneficial impacts. This would enhance the repayment capacity of borrowing countries.     

THE RELATIONSHIP BETWEEN DEBT LEVEL AND FISCAL SUSTAINABILITY IN ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT COUNTRIES

In this article we unify the traditional approaches to testing for fiscal sustainability considering the stock‐flow system that fiscal variables configure. Our approach encompasses previous ways of testing for sustainability. The results obtained for a group of 17 Organization for Economic Cooperation and Development (OECD) countries point to weak fiscal sustainability, as well as to the existence of cointegration between deficit and debt, confirming the relevance of the stock‐flow approach. Allowing for structural breaks and multicointegration turns out to be of critical importance to assess whether the fiscal authorities apply their policies looking for sustainability and whether, simultaneously, they try to stabilize real debt target levels. (JEL H62, E62, C22)     

What are the likely interactions among innovation,government debt,and employment?

The study here analyzes the interactions among labor, R&D intensity, and public expenditure on education (indicators of innovation), considering public debt of countries. The study is based on 27 European countries over the 1995–2009 and applies multiple regression analysis. Main findings seem to be: a significant interaction of public expenditure on education and R&D intensity with employment rate, whereas an increase of general government consolidated gross debt has a negative interaction for employment rate as well as for technology indicators. The theoretical framework and empirical evidence suggest vital political economy implications to support employment rate during contractions of the business cycle. In particular, considering the specificity of the economic structure of countries, a fruitful lung-run political economy of growth should slowly dry out public debt by supporting GDP growth, rather than reducing government debt with high taxation and balanced-budget rules, in order to decrease frictional effects for patterns of economic, technological, and employment growth.     

Aid and Fiscal Deficits: Lessons from Uganda on the Implications for Macroeconomic Management and Fiscal Sustainability

This article contributes to the ongoing debate on the macroeconomic management of large aid inflows to low‐income countries by analysing lessons drawn from Uganda, where the fiscal deficit before grants, which was largely aid‐funded, doubled to over 12% of GDP in the early 2000s. It focuses on the implications of the widening fiscal deficit for monetary policy, the real exchange rate, debt sustainability and the vulnerability of the budget to fiscal shocks, and argues that large fiscal deficits, even when funded predominantly by aid, risk undermining macroeconomic objectives and long‐run fiscal sustainability.     

The Prospects for Foreign Debt Sustainability in Post‐Completion‐Point Countries: Implications of the HIPC‐MDRI Framework

The Enhanced HIPC Initiative was launched in 1999 to reduce the Net Present Value (NPV) of foreign debt of the world's poorest countries to a sustainable threshold of 150% of their exports. This article applies a simple growth‐with‐debt model to 16 post‐completion‐point HIPCs to assess whether this goal will be met by 2015. Its somewhat optimistic base‐case projections suggest that participation in the current Enhanced HIPC‐MDRI initiative will only reduce the NPV of their total external debt to 176% of exports by this date. Sensitivity tests which expose these countries to adverse exogenous shocks help draw attention to policies that could ensure that they do not again accumulate unsustainable debt levels.     

Assessing international organizations’ support to social enterprise

This article takes stock of a sample of interventions and programmes across different countries and regions supported by international organizations to foster the development of social enterprise. The primary objective of the article is to generate a compilation of such interventions and draw some lessons about their potential contribution to the growth and sustainability of the sector. The results indicate that international organizations’ support to social enterprise has focused primarily on the provision of financial resources, notably loans and grants. While programmes remain largely unassessed, the few available rigorous evaluations show that social enterprise has the potential to be a cost‐effective mechanism to deliver basic social services to the poor. The article proposes a set of policy recommendations directed primarily to international organizations and the public administration to improve and enhance their support to the sector.     

WHY DO GOVERNMENTS END UP WITH DEBT? SHORT‐RUN EFFECTS MATTER

This paper reconsiders the impact of public debt in an economy with heterogeneous households and incomplete markets to emphasize the short‐run effects of an increase in public debt. As compared to models that rest on steady‐state analysis, we show that the welfare gains of a public debt increase are substantially higher when transitional dynamics are accounted for. The additional debt issue allows for a temporary reduction in the income tax rate, which stimulates labor supply and generates an overshooting of the interest rate. The short‐run gains create a temptation to deviate toward higher levels of debt. Debt increases continue to generate welfare gains even when debt is considerably higher than its long‐run optimal level. (JEL E60, H60)     

Economic Dependency and HIV/AIDS Prevalence in the Developing World: A Comparative,Longitudinal Analysis

The HIV/AIDS pandemic has plagued global society for over three decades. While breakthroughs in antiretroviral treatments (ART) have proven effective in suppressing the virus and HIV/AIDS intervention outreach have widened, epidemic control remains unevenly achieved among countries. At least 95 percent of HIV/AIDS sufferers originate from developing countries. Dependency theory suggests that developing countries' reliance on debt, trade, and foreign investments pose negative effects on their populations' health. Guided by dependency theory's propositions, this cross‐national study assesses whether increasing dependence on trade, debt, and foreign direct investment potentially increases adult HIV prevalence in developing countries from 1989 to 2012. Using a sample of over 80 nations, we perform a two‐way fixed‐effects OLS regression to evaluate the impact of increasing debt, trade, and foreign investment on adult HIV prevalence. Total debt, short‐term debt, external debt, and GDP were found to increase HIV prevalence. The findings for debt support dependency theory's predictions concerning the ramifications of global economic inequality on HIV/AIDS prevalence.     

GOVERNMENT DEBT‐THRESHOLD CONTRACTS

Politicians tend to push the amount of public debt beyond socially desirable levels in order to increase their reelection chances. We develop a model that provides a new explanation for this behavior: office holders undertake debt‐financed public projects, but postpone the timing of part of the output to the next term. This makes it difficult to replace them. As a consequence, the office holders' reelection chances rise—as does public debt. As a potential remedy for this inefficiency, we allow candidates for public office to offer government debt‐threshold contracts. Such a contract contains an upper limit for government debt and the sanction that an office holder violating this limit cannot stand for reelection. We show that such competitively offered contracts contain low debt levels that limit debt financing and improve the citizens' welfare. When negative macroeconomic events occur, government debt‐threshold contracts may be violated, and the economy is stabilized. (JEL: D7, D82, H4)     

Debt‐Relief Effectiveness and Institution‐Building

This article provides new evidence on the effects of recent debt‐relief programmes on different macroeconomic indicators in developing countries, focusing on the Heavily Indebted Poor Countries (HIPCs). The relationship between debt relief and institutional change is also investigated to assess whether donors are moving towards ex‐post governance conditionality. Results show that debt relief is only weakly associated with subsequent improvements in economic performance but is correlated with increasing domestic debt which undermines the positive achievements in reducing external debt service. There is also evidence that donors are moving towards a more sensible allocation of debt forgiveness, rewarding countries which have better policies and institutions.     

The restructuring of the U.K. financial services industry in the 1990s: a reversal of fortune?

Whereas for much of the 1980s the financial services industry was characterised by growth and expansion, the late 1980s and early 1990s was a period of redundancies and financial losses. This paper seeks to explain this reversal of fortune and the responses of the financial services industry. The restructuring of the financial System at a global level, through a process of disintermediation, and at a national level, in response to financial re-regulation, led to an intensification of competition between financial institutions and helped produce a developed countries debt crisis, founded in personal and corporate indebtedness. In the wake of this crisis, the financial services industry has been in transition. Bureaucratic labour market models have been overturned in favour of more flexible variants, while at the same time many financial services firms have engaged in the wholesale spatial reorganisation of their activities. One important consequence has been a process of ‘financial infrastructure withdrawal’, by which services and operations are withdrawn from certain social groups and certain localities. This process, which revolves around a rubric of risk reduction and a ‘flight to quality’, has introduced an element of exclusion and closure to the operation of financial Systems within developed countries. In this sense, the reaction of the financial services industry to the developed countries debt crisis mirrors that which followed the less developed countries debt crisis of the early 1980s; that is, abandonment and retreat to a more affluent client base. As was the case during the less developed countries debt crisis, the current process of financial infrastructure withdrawal has serious social and economic implications for those social groups and localities abandoned by the financial community.     

Debt and the Built Urban Environment: Examining the Growth of Urban Slums in the Less Developed Countries, 1990–2010

The present study examines the influence of external debt on the change in the proportion of the total population living in urban slum conditions in the less developed countries between 1990 and 2010, drawing from a political economy of the world-system theoretical perspective. Ordinary least squares panel regression illustrates external debt as a percent of gross national income has a statistically significant positive effect producing higher levels of urban slum growth. This result is recurrent across all developing countries but is particularly strong among sub-Saharan African nations. Further, urban population growth 1960–1990 exhibits a positive effect contributing to higher urban slum growth. The results support the hypothesis that external debt burden is an important factor contributing to higher levels of urban slum growth in the less developed countries between 1990 and 2010. This effect, moreover, is particularly strong among sub-Saharan African countries relative to developing countries within other regions of the world.     

What drives youth unemployment in Europe? Economic vs non‐economic determinants

This article explores the main determinants of youth unemployment in Europe in the period 2002 to 2014 by estimating panel data models for the 28 Member States of the European Union (EU). Heterogeneity is acknowledged by estimating models for subsamples of countries with “high” and “low” youth unemployment rates. The main results suggest that youth unemployment is more pronounced in countries with poor GDP growth, a low share of construction activity and high public debt. Reduced mobility (owing to homeownership), corruption, reception of a high level of remittances and a lack of possibilities for young people to live outside parental homes are also important factors.     

What Did US$18 bn Achieve? The 2005 Debt Relief to Nigeria

Since 2003 Nigeria's economic growth has been consistently above 6% and has been driven by non‐oil sectors. This article attempts to assess the contribution of the 2005 debt‐relief agreement to this higher growth. The agreement eliminated Nigeria's US$30 billion debt to Paris Club creditors who cancelled US$18 bn, while Nigeria paid back US$12 bn. The article traces the three possible impact channels of debt relief, namely, the flow (reduced debt service), the stock (removal of debt overhang) and the conditionality channel, and comes to the conclusion that the debt‐relief agreement played a key role in the country's improved economic performance, in particular through successful conditionality.     

Recession and Migration: A New Era for Labor Migration?

The current recession, the worst in a half century, is likely to affect international migration differently than past recessions. In 1973–1974 and 1981–1982, rising oil prices led to recessions in oil‐importing countries and economic booms in oil‐exporting countries, enabling some migrants to shift from bust to boom areas, as from Europe to the Middle East. The 1997–1998 Asian financial crisis did not spread globally, and was followed by a relatively quick resumption of economic and job growth that attracted migrant workers. The 2008–2009 recession is most severe in countries that had the most severe debt excesses, including the U.S., Spain, and Eastern Europe, and in countries most dependent on trade, including many Asian countries. New deployments of migrants are likely to slow, but what is not yet clear is how many migrants who lose jobs will remain abroad.     

The negative effects of construction boom on urban planning and environment in Turkey: Unraveling the role of the public sector

Construction sector is usually accepted as the engine that triggers economic growth due to its strong backward and forward linkages with other sectors. On the other hand, it is also argued that increased construction activity could end up with negative economic, social and environmental impacts. The literature emphasizes the role of public sector, especially the national governments in minimizing the negative impacts of construction activity. The related arguments mostly postulate that public sector is well aware of the environmental challenges caused by construction activity and devoted to the understanding of how to improve the sustainability performance of private developers. Yet the case of Turkey provides significant evidences to question these assumptions. In this respect, this paper elaborates on the negative impacts of increased construction activity in Turkey and argues the role of public sector in intensification of the negative environmental effects through deregulation on urban planning and housing production by public agencies. The findings of the research highlight the importance of sustainable construction and verify the need for mainstreaming of sustainable construction into public policy-making at national and local levels, especially in developing countries, where most, if not all, of the future urban population growth will take place.     

How Do Workers’ Remittances Respond to Lending Rates?

The literature on migrants’ motivation to remit ranges from self‐interest to altruism where studies analyse the impact from home country interest rates or interest differentials between home and host countries. We reinterpret the interest rate elasticity of remittances as a form of debt‐repayment responsiveness rather than based on opportunistic motivation. Modelling altruistic transfer and debt‐repayment, we find that, for a panel of countries, the long‐run responsiveness of remittances to changes in real lending rates is negative. This suggests that an expansionary (contractionary) monetary policy is most likely to lead to an increase (reduction) in remittances in the long‐run. In contrast to this, the short‐run impact of interest rate changes on remittances is positive.     

LEARNING ABOUT EDUCATION

Limited human capital investment is a common characteristic of low‐income countries despite the fact that estimated returns to educational investment in low‐income countries are generally higher than those in high‐income countries. Empirical evidence suggests that income and credit constraints can only account for a part of this underinvestment. Recent experimental evidence shows that families' misperceptions about the returns to education play a role in their low‐investment levels. This paper builds a heterogeneous‐agent model of human capital and growth that incorporates an adaptive learning mechanism to capture the way agents form perceptions about returns to education. We find natural conditions guaranteeing existence of stable equilibria. Along transition paths, agents' misperceptions about returns to education depress realized returns, which serves to reenforce and perpetuate low human‐capital investment. If human capital investments have both private and public returns, we find multiple stable equilibria, including those which are characterized by low investment and low returns. (JEL D83, O10, I25)     

Debt–Growth Nexus: A Spatial Econometrics Approach for Developing Countries

The objective of this paper is to examine the role of external debt in a country’s economic growth. With 31 developing countries divided into four regions, this paper employs the recent technique of spatial econometrics to incorporate the neighbouring effect in the debt–growth model. The empirical results reveal that the East Asia and Pacific, Latin America and Caribbean and the Sub-Saharan Africa regions provide convincing evidence to support a negative relationship between the external debt and economic growth. In addition, there is evidence to support the existence of spillover growth among neighbouring countries. This suggests that the role of spatial correlation is important and should be considered for any analysis of the growth model.