Working Paper: NBER ID: w2607
Authors: Andrew Berg; Jeffrey Sachs
Abstract: This paper develops a cross-country statistical model of debt rescheduling, and the secondary market valuation of LDC debt, which links these variables to key structural characteristics of developing countries, such as the trade regime, the degree of income inequality, and the share of agriculture in GNP Our most striking finding is that higher income inequality is a significant predictor of a-higher probability of debt rescheduling in a cross-section of middle-income countries. We attribute this correlation to various difficulties of political management in economies with extreme inequality. We also find that outward-orientation of the trade regime is a significant predictor of a reduced probability of debt rescheduling.
Keywords: Debt Rescheduling; Developing Countries; Income Inequality; Trade Regime
JEL Codes: F34; O11; O16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher income inequality (D31) | political instability (O17) |
| political instability (O17) | higher probability of debt rescheduling (F34) |
| higher share of agriculture in production (Q11) | greater political stability (F55) |
| greater political stability (F55) | lower likelihood of debt crises (F34) |
| higher income inequality (D31) | higher probability of debt rescheduling (F34) |
| outward-oriented trade regime (F13) | lower probability of debt rescheduling (F34) |