Development and foreign debt: The stylized facts 1970-2006

The paper uses the data from the incomplete debt cycle for the LDC world from 1970 onwards to tell the typical story of debt. Two debt stories are contrasted: A good debt story: Here countries borrow and invest wisely, so that they grow more. A bad debt story: Here countries borrow when they are in crisis, and the debt grows and generates low growth in the next couple of decades. The analysis concentrates on two relations: (R1) the relation between borrowing and growth, and (R2) the relation between initial debt and growth. Both relations are negative, so essentially the stylized story of debt is a story of bad debt. The paper looks in vain for non-linearities in the two relations, suggesting that the good debt story applies in some part of the range. The result thus confirms that international transfers to governments are an inefficient way to promote development.