# Ishrat Husain: The World Bank, Washington, D.C.

# INRODUCTION

In the development economics literature, there is a genzral consensus that the less developed countries will normally incur current account dericits and rcmain structural capital importers until they emerge from underdevelopm.-nt. It is also true that the bulk of the financing of these deficits would be provided by net capital inflows that give rise to external indebtedness. After all, that is how most of the developed countries of today achieved their growth. So, there is nothing intrinsically wrong with external borrowing per se. The crucial question is how best should developing countries manage external debt without plunging themselves into a crisis.<sup>2</sup> This is by no means an easy task as it involves some important trade-offs that balance the positive effect of external borrowing with its adverse affect on debt accumulation. The link between borrowing and growth is quite complex On the one hand, external financing enables the borrowing country to achieve higher levels of imports and investment than can be warranted by domestic savings alone. On the other hand, to be able to fully service the debt when it falls due, the borrowing countries should have generated reasonably high growth and in **turn** trade and saving surpluses. If this link between higher levels of imports and investment does not transmit itself into high growth in income and exports then the borrowing countries face serious difficulties. Most of the academic and popular discussion in recent years has exclusively focussed on the origin and factors contributing to the debt crisis, the behavior and responses of highly indebted countries in Latin America and Africa, the bargaining between these countries and their creditors and the impact of debt overhang on the economic conditions of these countries. Very little has been said about the 60 countries or so that were able to avoid plunging into this crisis and able to strike the trade-offs required. This paper attempts to fill this gap in the literature and reviews the experience of external debt management of Asian developing countries during the past twenly years, compares this with the highly indebted countries and draws some lessons for enhancing our understanding of the management of external debt.<sup>3</sup> As the region contains a variety of countries with different characteristics, endowments, and economic _structures, it_ is useful to provide a typology of Asian developing countries on the basis of their income and debt burden.

The World Bank classifies countries in three categories: high income (more than $6,000 per capita income), middle income ($581 - $5,999) and low income (less than $580). Hong Kong, Singapore, and Taiwan 1 The author is Chief, Debt and Intemational Finance Division, World Bank. The views expressed in this paper are those of the author's **and** should not **be** attributed to the World Bank, its **Board** of Directors, its management or any of its member countries. **The** author has drawn freely from **a** number of intemal Bank studies in the preparation of this paper and he wishes **to** thank Mr. Ning **Zhu** for his assistance in preparing the statistical tables. 2For a survey of the literature on the relationship between external debt and growth in developing countries, see McDonald, D.C. (1982), 'Debt capacity and Developing Country Borrowing,' **sIF** Staff Papers 29 (4).

31he other study which attempts to make a comparative analysis of extemal debt and macroeconomic performance is Jeffrey Sachs, External Debt and Macroeconomic performance in Latin America and East Asia,' Brookings Paper on Economic Activity 2. (1985). That study covered six Latin Amencan and four East Asian countries and was limited up to the period 1983. The analysis was a very useful exposition of the political economy of Expon-led and Import-substitution strategies and an cxplanation of the differing exchange and trade regimes in Latin Amenca and Asia