Growth Implosions, Debt Explosions, and My Aunt Marilyn: Do Growth Slowdowns Cause Public Debt Crises?

35 Pages Posted: 20 Apr 2016

See all articles by William Easterly

William Easterly

New York University - Department of Economics

Date Written: November 1999

Abstract

The worldwide slowdown in growth after 1975 played an important role in the debt crisis of the middle-income countries in the 1980s, the crisis of the heavily indebted poor countries in the 1980s and 1990s, and the increased public debt burden of the industrial countries in the 1980s and 1990s.

"Never take a sleeping pill and a laxative on the same night." -Saying passed along by author's Aunt Marilyn

The worldwide slowdown in growth after 1975 was a major negative fiscal shock. Slower growth lowers the present value of tax revenues and primary surpluses and thus makes a given level of debt more burdensome. Most countries failed to adjust to the negative fiscal consequences of the growth implosion, so public-debt-to-GDP ratios exploded.

The growth slowdown therefore played an important role in the debt crisis of the middle-income countries in the 1980s, the crisis of the heavily indebted poor countries (HIPCs) in the 1980s and 1990s, and the increased public debt burden of the industrial countries in the 1980s and 1990s.

Moreover, the HIPCs' debt problems were worse than elsewhere because, as a result of poor policies, these countries grew more slowly after 1975 than other low-income countries.

Econometric tests and fiscal solvency accounting confirm the important role of growth in debt crises.

This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study economic growth and fiscal sustainability. The author may be contacted at weasterly@worldbank.org.

Suggested Citation

Easterly, William, Growth Implosions, Debt Explosions, and My Aunt Marilyn: Do Growth Slowdowns Cause Public Debt Crises? (November 1999). World Bank Policy Research Working Paper No. 2531. Available at SSRN: https://ssrn.com/abstract=632601

William Easterly (Contact Author)

New York University - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

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