4 The external circumstances facing Asian countries in the 1970s and early 1980s were no different from those faced by the Latin American and African countries. Oil price shocks, low cost of funds, falling commodity prices and recession in the industrial countries stimulated the demand for external borrowing while the excess liquidity of commercial banks pushed the supply of these funds. A proxy variable<sup>used for capturing the</sup> influence cl externai envirunilnlit dli **wllAb vAI iLlad** Th. 0 I ' 1 4,,- i -Sf trade of Asian countries declined (0.6 percent per year) during 1973-82 compared to an<sup>increase (3.8 percent) for the</sup> highly indebted countries. The volatility in the termns-of-trade was, however, considerably<sup>higher for the latter</sup> group of countries. Sachs<sup>5</sup> who estimated the real income effect of terms-of-trade change for the<sup>period 1979-85</sup> did not find any significant differences between the two groups of countries. His<sup>broad conclusion based on</sup> calculation of combined effect of the terms-of-trade and interest rate shock was that macroeconomic<sup>performance</sup> and the need to reschedule were not closely tied to the mag niitude of the external shocks as a<sup>proportion of</sup> GDP. Donovan's study<sup>6</sup> of a larger sample of middle-income developing countries also<sup>found that the</sup> magnitude of terms-of-trade movements was not markedly different for groups of reschedulers<sup>and non-</sup> reschedulers.

The main question explored in this paper is: Given the same international economic environment and no differences in the magnitudes of external shocks, why have the Asian countries avoided<sup>the debt crisis while</sup> the Latin American and African countries have been embroiled in this unfortunate situation<sup>for almost a decade</sup> now. It is not proposed to provide a fully satisfactory or rigorous answer to this question,<sup>but based on a number</sup> of empirical studies carried out within and outside the Bank some plausible hypotheses and supporting evidence are presented to shed some light. It needs to be emphasized at the outset, that the<sup>analysis presented here</sup> should not be interpreted as if the Asian countries were above comrmiitting mistakes or they did everything right all the time. Alternatively, it would be unfair to characterize that the Latin Americans<sup>were never able to put</sup> their act together and kept on repeating the same errors of judgement. It is equally plausible that the facts and hypotheses that guided their policy decisions turned out to be quite different in actual implementation of these policies. The actual outcomes examined over an extended period of time tend t^ mask the complex<sup>itterplay</sup> of forces and interactions that took place during the course of events in the 1970s<sup>_F_</sup> d 1980s.<sup>The analysis</sup> therefore abstracts from these complex interactions and presents a relatively simplified picture<sup>of the end results.</sup>

# DOMESTIC Pt)LICY ENVIRONMENT

The differences in economnic and market structure do persist between the countries in the<sup>three regions</sup> and so do levels of institutional development. They may also, in part, explain for the differentiated<sup>economic</sup> performance. Other variables such as human resource development and skill mix of the labor<sup>torcewhuch attect</sup> the growth in a longer time horizon may also be equally important. The "new"growth theorists<sup>have provided</sup> evidence that increasing returns or positive externalities from such factors as knowledge<sup>and human capital can</sup> explain the divergence in growth rates among developing countries. It is also becoming<sup>clear that the impact</sup> on growth of better economic policies and more education, together is greater than the<sup>sum of each separately.</sup> A comparison of the human development indicators of the Asian countries in this sample<sup>with those of the most</sup> severely indebted countries in Latin America, do not bring out any significant difference<sup>in this aspect (see Table</sup> 4). Eight out of ten Asian countries in the sample are classified as having medium or low<sup>human development</sup> indices. On the other hand, five highly indebted countries Chile, Costa Rica, Argentina, Venezuela and Mexico fall under high human development class. Of course, the same indicators for Sub-Saharan<sup>Africa are quite low.</sup> S Sachs,<sup>ibid.</sup>

> 6 Doral Donovan, 'The sources of External Debt Difficulties: Some empirical evidence.' tF

Discusaion Memorandum 84/15 (1984).