Debt trap, debt burden shifting, and welfare loss:
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Date
2007
Authors
Noor Alam
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Abstract
This study adopted a macro approach for debt trap, a subject that was much neglected in
terms of empirical evidences. The study represented the limited attempts to model debt
trap by operationalizing it through the basic borrowing fundamentals. By studying the debt
trap phenomenon, the study provided insights into how to avoid debt trap and to identify
good debt management practices that would eventually lead the country to better
development. The study has selected a group of fourteen Asian Pacific Developing
countries which are Bangladesh, Fiji, India, Indonesia, Korea, Malaysia, Myanmar, Nepal,
Pakistan, Papua New Guinea, Philippines, Singapore, Sri Lanka, and Thailand. These
countries have been classified as debt trap and non debt trap countries based on basic
borrowing fundamentals. The study followed panel data approach for a period of thirty
years (i.e., from 1971 to 2000). Findings of this study show that the debt trap countries
exhibit an explosive growth trend in external debt that creates the moral hazard behavior
on the part of the policy makers to shift the debt burden by taking in either increased debt
or prolonging the maturity period further and this eventually affects the nation’s well being. Non debt trap countries followed basic borrowing fundamentals closely and managed their foreign exchange risk exposures very well. Moreover, they utilized the borrowing funds prudently and appropriately channeled for development purposes. In contrast, debt trap countries adopted an aggressive debt financing and diverted borrowing funds towards unproductive means. They did not manage the foreign exchange risk exposure properly. The rapid depreciation in their domestic currency caused capital loss that exacerbated the situation.
Description
PhD
Keywords
Management , Debt trap , debt burden shifting , welfare loss , developing countries