LDC savings rates and debt crises

Abstract

Conventional wisdom holds that LDC debt problems reflect, in part, the switch of foreign financing towards commercial loans. With no adequate supervision over the use of these funds, international finance may not have improved the capacity to repay external debt. This paper tests two aspects of this proposition. First, have commercial loans been directed more towards consumption and less to investment than official loans? We find no evidence to suggest this has been true. Second, does an increase in the marginal propensity to invest out of foreign loans improve creditworthiness? Again, we find no supporting evidence. We do find, however, that raising the marginal rate of domestic saving out of income does improve creditworthiness. This provides justification for policy conditionality associated with foreign borrowing that goes beyond concern with the uses of individual loans.