Debt levels in developing countries heighten vulnerability

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Rising indebtedness may be a global phenomenon, but the debt levels of developing countries are amplifying their economic vulnerability, UNCTAD’s new research warns.

Many developing countries have experienced growing – and in some cases premature – connectivity to international financial markets following the debt relief afforded by the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative.

“There have been rising levels of developing country debt – the demand for which moves in step with international forces that have little to do with the management of the debt sustainability by developing countries,” the research paper says.

It observes that the vulnerabilities now facing developing countries are influenced by global trends over which they have little control, and which influence their domestic outcomes.

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The paper calls for a more balanced growth strategy in developing countries to better enable them to manage existing and future debt burdens.

Such a strategy requires a range of policy instruments for more careful internal and external integration.

It required polices to boost effective demand, to increase labour incomes and to reform and re-regulate financial markets, the paper notes.

Debt levels in developing countries heighten vulnerability

Managing existing and future debt

According to the paper, an essential part of managing existing and future debt – and what developing countries need most – is long-term access to foreign demand and thus reliable export markets.

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This would support their emergent domestic growth and investment to repay external debt.

The paper proposes four areas of reform in the context of UNCTAD’s commitment to Finance for Development:

  • Establishment of a robust domestic “profit-investment” nexus that promotes a dynamic interaction between private sector profit expectations, actual investment, realised profits and growing retained earnings. This necessitates a development strategy that involves well-planned public investment in essential infrastructure to create productive links with domestic private investment projects.
  • Encouragement of an international trade system that inclines towards development – with surplus countries investing in deficit countries and lending to them on reasonable terms.
  • Harnessing of regional payment systems and clearing unions to strengthen regional and macroeconomic stability, create liquidity buffers against exogenous shocks – and encourage the promotion of intraregional trade.
  • Leveraging the strength of south-south multilateral development banks in providing subsidized loans for development in least-developed countries.
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