Developing Countries’ External Debt and International Financial Integration

Abstract

This paper assesses the dynamics of developing and emerging countries external debt and financial vulnerability. It is argued that, although current account positions do have a role in accumulating external liabilities, developing countries’ vulnerability primarily lie in their increasing financial integration, which has resulted in the growth of their cross-border assets and liabilities. Rather than government falling into net indebtedness, which actually fell in many countries in recent years, developing countries are now more likely to be hit by financial instabilities originating from private credit and financial markets.

Keywords: developing countries, external debt, debt sustainability, financial integration

JEL Classification: F32, F34, F40