16 ratios, expansionary monetary policy and<sup>higher foreign deb. reduce savings. As pointed out earlier, East Asian</sup> countries had higher real rates of<sup>interest, relatively lower budgetary deficits and tight monetary policies</sup> throughout this period with some<sup>exceptions and interruptions.</sup> In recent years, however, the growing<sup>government hudgetary deficits in India and Pakistan have created</sup> pressures on the sustainability of their<sup>creditworthiness. Interest payments on internal and external borrowing</sup> are growing rapidly and accounted<sup>for 30 % of current expenditure in Pakistan and 25 % in India. The domestic</sup> resource gap is bigger than the current account<sup>deficit as rernittances from workers abroad are substantial. But</sup> the recent Gulf Crisis exposed the vulnerability<sup>of these countries to reliance on this source of foreign exchange.</sup> The heavily indebted countries of Latin<sup>America got into trouble precisely because of large public sector deficits</sup> which were financed through monetary expansion<sup>and large borrowing. The South Asian countries should learn</sup> from the lessons of the HICs and take<sup>steps to contain their fiscal imbalances. But they must also ensure that</sup> fiscal contraction does not reduce investment<sup>in social sectors and that demand management is accompanied by</sup> structural reforms, particularly in incentive<sup>policies.</sup>

# CONCLUSIONS

The case of Asian developing countries<sup>in managing their foreign debt burden presents a contrast to</sup> Latin American and African countries.<sup>' For the latter group, the combination of inward-oriented strategy, poor</sup> quality of macroeconomic policies and investment<sup>in unproductive ventures contributed a great deal towards the</sup> final outcome. A study of the twelve<sup>highly indebted countries carried out by the World Bank in the mid-1980s,</sup> concluded that the quality of economic<sup>management in these countries themselves was the decisive determinant</sup> leading them towards the path of<sup>debt crisis.</sup> The Asian countries, with a<sup>few exceptions, pursued an outward-oriented strategy, and prudent</sup> macroeconomic policies. They made quick<sup>adjustment to external shocks by expenditure switching, expanding</sup> exports and curtail;ng consumption.<sup>Most of the borrowed and locally raised funds were invested in productive</sup> uses that raised the capacity of the<sup>economy to repay the debt. These countries relied heavily on domestic</sup> savings and domestic resources for financing<sup>investment.</sup> It would be misleading to suggest that<sup>the Asian countries did not have their crisis periods -either</sup> induced by domestic policy slippages<sup>or extemal shocks. Korea met a serious crisis in 1980. Indonesia faced</sup> difficult problems when oil prices fell<sup>in 1983. Malaysia was confronted with a current account deficit of 14</sup> percent of GNP in 1982. But the important<sup>point to note is that in each case adequate, strong, and timely policy</sup> 1CGFV1v,0 **tV"Z4,,IJ** _LiC_ **The.a:c. ..** cr.ise's otr A t. ***** 4 r g agra _-iSA_ At " v a whole period of two decades is examined,<sup>the end-results appear impressive as presented in this paper.</sup> In the Latin American countries,<sup>the governments expanded external borrowing to offset the effects of</sup> extemal shocks. In Brazil, it led<sup>to substitution for domestic savings by foreign resources to support import</sup> substitution strategy and in Mexico fiscal<sup>deficits were financed by external borrowing.</sup> At the same time, the domestic residents<sup>of these countries transferred billions of dollars abroad. Why</sup> did capital flight occur on such a massive<sup>scale? The answer has much to do with fiscal, monetary and balance</sup> of payments management, and in particular<sup>with the maintenance of overvalued exchanee rates and unattractive</sup> interest rates intended to curb inflation.<sup>Overvalued exchange rates and uncompetitive interest rates have clearly</sup> been shown to encourage capital<sup>flight.</sup> Tn the longer run, distorted exchange<sup>and interest rates erode</sup> 2sThe references in Latin American<sup>and African countries in this study pertain to the period prior to 1987. Since 1987,Chile,</sup> Mexico and Venezuela have undertaken<sup>successful economic reforms and achieved significant progress. Argentina, Peru and Brazil</sup> have also initiated some reforms, but<sup>it is too early to judge the resulu</sup> Similarly, more than twenty African<sup>countries are currently</sup> pursuing structural adjustment programs<sup>and the preliminary results are encouraging</sup>