A Critical Analysis of the Debt Service Capacity of Developing Countries

Abstract

During the past several years the external indebtedness of developing countries, specially those which must import oil, has been the focus of much attention and concern. The basic issue is whether or not the amount of debt has become so large, relative to the developing countries' ability to service it, that there will be a series of defaults leading eventually to a collapse of the world's banking system. There is no consensus of opinion. In studies based on the debt level of developing countries it is as likely to be argued that the level is manageable as it is to argue that the world's financial system is facing a real and imminent crisis. The objective of this paper is to identify and evaluate the arguments raised on both sides of the issue. There are a number of international and domestic developments which have contributed to this concern including oil price increases, inflation, a reliance on debt to fund development plans, declining growth in industrialized countries, deteriorating balance of payments and the increased proportion of commercial bank lending to these developing countries. We begin with a look at the oil price increases.