External Debt and Economic Reform: Does a Pain Reliever Delay the Necessary Treatment?

Author/Editor:

Athanasios Vamvakidis

Publication Date:

March 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Recent literature argues that conflict in shifting adjustment costs between different socioeconomic groups delays necessary reforms and finds that such reforms often follow economic crises. This paper expands these models by including external borrowing by the private sector and shows that this may lead to a further delay in economic reform. Empirical evidence based on a large panel of developing and emerging economies supports this argument and shows that the result is slower economic growth. External financing sometimes acts like a "pain reliever," postponing the much needed "treatment" of a "sick" economy by reform.

Series:

Working Paper No. 2007/050

Subject:

External debt Financial crises Public debt Short term interest rates Structural reforms

English

Publication Date:

March 1, 2007

ISBN/ISSN:

9781451866148/1018-5941

Stock No:

WPIEA2007050

Pages:

27

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