Debt management and crisis in developing countries
- Michael P. Dooley
- Jan 2000
- Journal of Development Economics
- International
Recent financial crises in Asia, Latin America and Russia have demonstrated the vulnerability of the real sectors of developing countries to changes in financial market conditions. A question presents itself - Can better management of governments’ balance sheets considerably reduce the frequency of crises and their associated costs?Approach to debt and asset management policy or, more generally, governments’ financial intermediation, is influenced by characteristics of developing countries not shared by industrialized countries. Experience suggests that a wide range of developing countries might choose or be forced to default on their domestic and/or their international debt. Moreover, renegotiations of contracts seem to generate losses in output for some interval following default. These characteristics imply that governments must manage the flow of income and expenditures as well as the nature of the financial contracts they enter into, in order to avoid crises. In particular, the benefits associated with governments’ financial intermediation must be balanced against costs of associated financial crises.
