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Mr. Tito Cordella, Luca Antonio Ricci, and Marta Ruiz-Arranz

Do highly indebted countries suffer from a debt overhang? Can debt relief foster their growth rates? To answer these important questions, this article looks at how the debt-growth relation varies with indebtedness levels, as well as with the quality of policies and institutions, in a panel of developing countries. The main findings are that, in countries with good policies and institutions, there is evidence of debt overhang when the net present value of debt rises above 20–25 percent of GDP; however, debt becomes irrelevant above 70–80 percent. In countries with bad policies and institutions, thresholds appear to be lower, but the evidence of debt overhang is weaker and we cannot rule out that debt is always irrelevant. Indeed, in such countries, as well as in countries with high indebtedness levels, investment does not depend on debt levels. The analysis suggests that not all countries are likely to profit from debt relief, and thus that a one-size-fits-all debt relief approach might not be the most appropriate one.

David Morgan

Since 1972 the major oil exporting countries have absorbed an unprecedented volume of resources. Initially, high government expenditures occurred, accompanied by accelerating expansion of domestic liquidity and inflation. Conditions eased after 1975, as domestic spending slowed and supply bottlenecks lessened. This article discusses the role and effectiveness of fiscal policy, particularly in the successful efforts to stabilize the domestic economy. The conditions for effective fiscal policy in oil exporting countries are not directly affected by the revenue effects of the latest round of oil price rises.

International Monetary Fund
This paper presents a detailed analysis of the average fiscal policy responses of oil producing countries (OPCs) to the recent oil price cycle. We find that OPCs worsened their non-oil primary balances substantially during 2003-2008 driven by an increase in primary spending. However, this trend was partially reversed when oil prices went down in 2009. We also find evidence that fiscal policy has been procyclical and has hence exacerbated the fluctuations in economic activity. In addition, we estimate that a small reduction in oil prices could lead to very large financing needs in the near future. Finally, we show that long-term fiscal sustainability positions in OPCs have worsened.
Mr. Johannes Wiegand
High oil prices have once again led to large external surpluses of oil exporting countries, similar to the 1970s and 1980s. This paper analyzes the extent to which (i) oil exporters use bank deposits to invest these surpluses, and (ii) banks are lending on these funds to emerging market economies. Bank recycling of petro dollars to emerging market economies is found to be almost as important as in the 1970s and 1980s, even though during the current boom, petro dollar bank flows tend to originate in countries like Russia, Libya, or Nigeria rather than in the Middle East. As one consequence, a fall in oil prices could yet again disrupt financing flows to emerging economies. Especially at risk could be countries that rely heavily on bank loans to finance external deficits, many of them in Emerging Europe.
Mr. Paul Collier, Rick Van Der Ploeg, Michael Spence, and Anthony J. Venables

This paper addresses the efficient management of natural resource revenues in capital-scarce developing economies. It departs from usual prescriptions based on the permanent income hypothesis and argues that capital-scarce countries should prioritize domestic investment. Because revenue streams are highly volatile, governments should protect consumption from shocks by increasing it only cautiously. Volatility in domestic investment can be moderated by a buffer of international liquidity, but it is also important to structure investment processes to be able to cope efficiently with substantial fluctuations. To date, most of the resource-rich countries of Africa have not had investment rates commensurate with their rate of resource extraction.

International Monetary Fund. External Relations Dept.

Global and national adjustment to promote sustainable growth in a changing world economy are the main topics of this year’s Report—the fourth in a series for the World Bank.