Pinto, BrianGill, Indermit2012-06-212012-06-212005-08https://hdl.handle.net/10986/8632Over the past 25 years, significant levels of public debt and external finance are more likely to have enhanced macroeconomic vulnerability than economic growth in developing countries. This applies not just to countries with a history of high inflation and past default, but also to those in East Asia, with a long tradition of prudent macroeconomic policies and rapid growth. The authors examine why with the help of a conceptual framework drawn from the growth, capital flows, and crisis literature for developing countries with access to the international capital markets (market access countries or MACs). They find that, while the chances of another generalized debt crisis have receded since the turbulence of the late 1990s, sovereign debt is indeed constraining growth in MACs, especially those with debt sustainability problems. Several prominent MACs have sought to address the debt and external finance problem by generating large primary fiscal surpluses, switching to flexible exchange rates, and reforming fiscal and financial institutions. Such country-led initiatives completely dominate attempts to overhaul the international financial architecture or launch new lending instruments, which have so far met with little success. While the initial results of the countries' initiatives have been encouraging, serious questions remain about the viability of the model of market-based external development finance. Beyond crisis resolution, which has received attention in the form of the sovereign debt restructuring mechanism, the international financial institutions may need to ramp up their role as providers of stable long-run development finance to MACs instead of exiting from them.CC BY 3.0 IGOAGENCY PROBLEMSBALANCE OF PAYMENTSBALANCE SHEETBANK FOR INTERNATIONAL SETTLEMENTSBONDSBORROWINGBUDGET CONSTRAINTBUDGET CONSTRAINTSBUDGET DEFICITSBUSINESS CYCLECAPITAL BASECAPITAL FLIGHTCAPITAL FLOWSCAPITAL INFLOWSCAPITAL MARKETSCAPITAL MOBILITYCENTRAL BANKCOMPETITIVENESSCONCEPTUAL FRAMEWORKCONSTANT RETURNS TO SCALECONTINGENT LIABILITIESCONVERGENCE HYPOTHESISCOUNTER-CYCLICAL POLICIESCROWDING OUTCURRENCY RISKCURRENT ACCOUNTDEBT INSTRUMENTSDEBT RATIOSDEBT RESTRUCTURINGDEBT/GDP RATIOSDEFAULT RISKDEFICITSDEVALUATIONDEVELOPING COUNTRIESDEVELOPING COUNTRYDIMINISHING RETURNSDISCOUNT RATEDOMESTIC POLICIESECONOMIC GROWTHECONOMIC OUTLOOKECONOMIC RATE OF RETURNECONOMISTSELECTRICITYEMPIRICAL EVIDENCEEQUILIBRIUMEXCHANGE RATEEXCHANGE RATE REGIMEEXCHANGE RATESEXTERNAL BORROWINGEXTERNAL DEBTEXTERNALITIESFINANCIAL INSTITUTIONSFINANCIAL INTEGRATIONFINANCIAL INTERMEDIATIONFINANCIAL MARKETSFINANCIAL OPENNESSFINANCIAL POLICIESFINANCIAL SECTORFINANCIAL SECTORSFINANCIAL SYSTEMFISCAL BALANCEFISCAL DEFICITSFISCAL POLICIESFISCAL POLICYFOREIGN CURRENCYFOREIGN EXCHANGEFOREIGN EXCHANGE RESERVESGDPGNPGOVERNMENT DEBTGOVERNMENT SPENDINGGROWTHGROWTH PACTGROWTH POTENTIALGROWTH RATEGROWTH THEORYHARD BUDGET CONSTRAINTSHIGH INFLATIONHUMAN CAPITALIMPLICIT EXCHANGE RATE GUARANTEESINDEXATIONINFLATIONINFLATION TARGETSINFLATION TAXINSTITUTIONAL DEVELOPMENTINSURANCEINTEREST RATEINTEREST RATESINVESTMENT OPPORTUNITIESLABOR FORCELIQUIDITYLOCAL CURRENCYLONG-RUN GROWTHMACROECONOMIC CRISISMACROECONOMIC ENVIRONMENTMACROECONOMIC FACTORSMACROECONOMIC FRAMEWORKMACROECONOMIC LITERATUREMACROECONOMIC POLICIESMACROECONOMIC POLICYMACROECONOMIC STABILITYMARGINAL COSTMARGINAL PRODUCTMICRO FOUNDATIONSMIDDLE INCOME COUNTRIESMORAL HAZARDNET DEBTNETWORK EXTERNALITIESOUTPUT VOLATILITYOVERVALUATIONPOLICY RESEARCHPOLITICAL ECONOMYPORTFOLIO ALLOCATIONSPOVERTY REDUCTIONPOWER PLANTSPRESENT VALUEPRESENT VALUE OF DEBTPRIMARY DEFICITPRIMARY DEFICITSPRIVATE INVESTMENTPRIVATE SECTORPRODUCTIVITYPRODUCTIVITY GROWTHPROPERTY RIGHTSPUBLIC DEBTPUBLIC GOODSPUBLIC INFRASTRUCTUREPUBLIC INVESTMENTPUBLIC INVESTMENT IN INFRASTRUCTUREPUBLIC INVESTMENT PROGRAMSPUBLIC INVESTMENTSPUBLIC SECTORPUBLIC SPENDINGREAL EXCHANGEREAL EXCHANGE RATEREAL GDPREAL INCOMEREAL INTERESTREAL INTEREST RATESREDISTRIBUTIVE TAXATIONRESERVE REQUIREMENTSREVENUE MOBILIZATIONSAVINGSSOFT BUDGET CONSTRAINTSSOVEREIGN RISKSTABILIZATION PROGRAMSTANDARD DEVIATIONSUSTAINED GROWTHTAXTAX RATESTAXATIONTECHNOLOGICAL PROGRESSTHEORETICAL MODELSTOTAL FACTOR PRODUCTIVITYTRANSACTIONS COSTSUSER CHARGESVOLATILITYWorld Bank10.1596/1813-9450-3674