Debt C risis and Debt Sustainability In Developing Countries

Debt C risis and Debt Sustainability In Developing Countries Yunhe Qiu A thesis submitted for the degree of Master of Science Wirtschaftsmathematik Models and Method in Quantitative Economics (QEM) Supervisor: Prof. Dr. Alfred Greiner University Bielefeld Matrikelnummer: 1950641 yunheqiu@gmail.com July, 2010!

Abstract: In this paper we, in order to find out how future debt crises can be prevented, first take a look at the history and development of the debt crisis in developing countries. We discuss the causation, as well as preferable, advantageous solutions for the developing countries debt crisis. And some policy suggestions are also given out at the end. Moreover, in order to find out if the governments of developing countries pursued a sustainable debt policy after they experienced the debt crisis, six selected developing countries from Asia and Latin America are tested in terms of sustainability of their public debt. The results show that, although there is a high debt ratio in some countries, the empirical evidence for most of the selected countries show that that their public debt is sustainable. #

CONTENT Content 1 Introduction... 1 2 Debt crisis in developing countries... 3 2.1 What is the government debt?... 3 2.2 Debt and development... 3 2.3 Causes of the debt crisis... 6 2.4 Solutions of the debt crisis... 9 2.5 Policy suggestion... 12 3 Debt sustainability in developing countries... 15 3.1 Theoretical considerations... 15 3.2 Data description... 18 3.3 Empirical Analysis... 18 3.3.1 China$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%! 3.3.2 India$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$%& 3.3.3 Philippines:$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$'% 3.3.4 Colombia$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$'( 3.3.5 Brazil$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$)! 3.3.6 Chile$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$)* 4 Conclusion... 49 References... 52 ##

LIST OF FIGURES List of Figures Figure 1 Figure 2 Public debt to GDP ratio for China. Primary surplus to GDP ratio for China. Figure 3 Scatter plot of st VS. dt 1 for China. Figure 4 Figure 5 Public debt to GDP ratio for India. Primary surplus to GDP ratio for India. Figure 6 Scatter plot of st VS. dt 1 for India. Figure 7 Figure 8 Public debt to GDP ratio for the Philippines. Primary surplus to GDP ratio for the Philippines. Figure 9 Scatter plot of st VS. dt 1 for the Philippines. Figure10 Figure11 Public debt to GDP ratio for Colombia. Primary surplus to GDP ratio for Colombia. Figure12 Scatter plot of st VS. dt 1 for Colombia. Figure13 Figure14 Public debt to GDP ratio for Brazil. Primary surplus to GDP ratio for Brazil Figure15 Scatter plot of st VS. dt 1 for Brazil. Figure16 Figure17 Public debt to GDP ratio for Chile. Primary surplus to GDP ratio for Chile Figure18 Scatter plot of st VS. dt 1 for Chile. ###

LIST OF TABLES List of Tables Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9 Table 10 Table 11 Table 12 Table 13 Table 14 Table 15 Table 16 Table 17 Table 18 Table 19 Coefficients for equation (6) for China. ADF Test result for China. Correlation test for residuals for China. Debt safety index for China. Coefficients for equation (6) for India. ADF Test result for India. Correlation test for residuals for India. Coefficients for equation (6) for the Philippines. ADF Test result for the Philippines. Correlation test for residuals for the Philippines. Coefficients for equation (6) for Colombia. ADF Test result for Colombia. Correlation test for residuals for Colombia. Coefficients for equation (6) for Brazil ADF Test result for Brazil. Correlation test for residuals for Brazil. Coefficients for equation (6) for Chile. ADF Test result for Chile. Correlation test for residuals for Chile. #+

ABBREVIATIONS Abbreviations AC ADF CACs CGC CNY DEF DW EU EIU GDP IMF MPDD OLS SDRM FRBMA PAC TFC Auto Correlation Augmented Dickey-Fuller Collective Action Clauses Code of Good Conduct China Yuan (Chinese Local Currency) Deficit Durbin-Watson Europe Union Economist Intelligence Unit Gross Domestic Product International Monetary Fund Macroeconomic Policy and Development Division Ordinary Least Squares The Sovereign Debt Restructuring Mechanism Fiscal Responsibility and Budget Management Act Partial Correlation Twelfth Finance Commission +

1. INTRODUCTION 1 Introduction The outbreak of the Euro area debt crisis made people realize once more that the immense growth of the public debt levels as well as the debt to GDP ratios has, in many parts of the world, turned out to be a serious problem. For the developing countries, the burden for the governments has remarkably increased since the 1970s. These governments have the tendency to be too easily affected by debt crises as has been seen during the recessions in the 1980s and the 1990s. We will, in the second chapter of this paper, discuss the debt crisis that affected the developing countries. Meaning we will try to gain an insight and find out just how these debt crises got to be, what the solutions are designed by officials such as the IMF (International Monetary Fund), the US Treasury as well as other official governmental institutions. And finally, In order to improve the policy system in developing countries some policy suggestions are given out in the last section of chapter two. This will be important for us, because our set goal will be to come up with possible solutions on how future debt crises can be prevented, meaning we will look at what actions governments of developing countries might need to take up, in order to avoid such hostile situations. And as we have known that the two debt crises of the 1980s and the 1990s brought severe damage to the economies of those countries in a developing state. Therefore from the economic point of view there is also a very important question, which definitely needs to be asked: Are the governments of the developing countries pursuing a sustainable debt policy after they experienced a debt crisis? In the third chapter, we will have a look at a group of six selected developing countries, these being from Asia but also from Latin America. Those chosen regions will be tested for the sustainability of debt policy. The countries that have been put into consideration are China, India, the Philippines, Colombia, Brazil and lastly Chile. The World Bank divide!

1. INTRODUCTION performance into different groups, which were calculated and then formed by using the World Bank Atlas Method. By this classification, Colombia, Brazil and Chile can be found in the upper middle income group, while China, India as well as the Philippines are located in the lower-middle income group. 1 There are various techniques to test the sustainability of fiscal policies. In this paper, I use the Bohn s approach (1998). His research concentrates on and analyses reactions of the primary surplus to GDP ratio to the change in the debt to GDP ratio. 2 And the similar research has been performed for European countries by Balabriga and Martinez-Mongay (2005) as well as by Greiner and Fincke for African and Latin-American countries. Further, we will apply an additional test which is going to analyze the stationary of Trehan and Walsh proposed to test the stationary of the government deficit in 1991. Their result supported that the path of public debt is sustainable, if the deficit including interest payments is stationary, that is under the condition that the interest rate is not negative. [Trehan and Walsh(1991)] There exist several possible approaches to the stationary test; we will rely on the Augmented Dickey-Fuller testing method in this paper.[ Dickey and Fuller (1981)] The paper is organized as follows: In chapter two the debt crisis in developing countries is being discussed, including the causation, solution but also the policy suggestion for the government. In chapter three the six developing countries that were mentioned earlier are tested for the sustainability of their fiscal policy. Chapter four will then finally, be the conclusion for the paper and presents closing remarks 1 According to the 2008 GNI per capital the groups are: low income, $975 or less; lower middle income, $976 - $3,855; upper middle income, $3,856 - $11,905; and high income, $11,906 or more. 2 Do governments in developing countries pursue sustainable debt policies? Empirical evidence for selected countries in Africa and Latin America, Bettina Fincke, Alfred Greiner, 2009. %

2. DEBT CRISIS IN DEVELOPING COUNTRIES 2 Debt crisis in developing countries 2.1 What is the government debt? The government debt is the total value of government bonds that are outstanding at any particular time. 3 And t It is possible to differentiate the government debt into two different categories: internal debt as well as the external debt. Internal debt means that the government owes capital to lenders from inside its own country, while external debt occurs when the capital borrowed comes from an external, meaning foreign source or lender. Usually governments acquire loans by issuing government bonds, securities and bills. Alternatively, there is also a way of directly borrowing capital from supranational institutions, but these are only accessible to a few creditworthy countries. It is also common that identified the government debt by duration until repayment. There are three different kinds of debt by duration : first is the so-called long term debt is usually set for a time span longer than ten years. In contrast to that you will find the short term debt, normally only taking up one year or less than that. A third variant of this debt form is the so-called medium term debt, which logically is somewhat in between the two boundaries above. 2.2 Debt and development The positive effect of government debt on a 4 Before we start it should be noted that there are three ways in which debt can affect a country s development positively. For the first manner it is important to understand ',-./01.0203#.45627/189$6:1;5912<$91/2-2=15%>>! )?@1/141-/.@02A@#214171:B3-2-C1312B4D4B135E02CF@-05%>>( '

2. DEBT CRISIS IN DEVELOPING COUNTRIES that government debt is a way of raising funds, keep the balance between revenues and expenditures while at the same time evenly offsetting the construction funds. With the development of a country's economy, the national financial functions are increasing in size. Finally chances are, our government will lack of the financial resources handle an economic situation. However, the debts can definitely be a feasible way to fill in this gap. Making an acceptable, sustainable amount of debt can both be used as compensation for budget deficits but also helps avoid overdraft from banks that would otherwise cause the problems of currency issuance and inflation. For example, in a certain set period, a government might need a huge amount of capital to ensure the provision of the nationwide coverage of energy, transportation and other infrastructural key elements. However, the money available from budget alone may not meet the internal needs, and external debt might just be the best way to attract foreign investors. The second way in which debt can affect the economy positively is by adjusting a country s industrial structure, regional structure as well as promote a stable development of the national economy. Like the external debt, it is usually applied to finance investment projects and programs such as those of the World Bank s energy or transportation program. These try and help to develop as well as enhance the energy supply or the coverage of transportation help to eliminate the bottlenecks of the development of the national economies. And the poverty alleviation projects are specifically designed to enhance the development of economically backward regions. These measures would help the entire country to benefit from the economic development and thus prevent a big financial and social gap between different regions or social classes. They would definitely contribute to social stability. Therefore, public debt is beneficial for the adjustment in a country's industrial structure while enhancing the compliance among different industries in order to achieve a healthy, nationwide development. )

2. DEBT CRISIS IN DEVELOPING COUNTRIES To enhance the country s economic growth, a government needs to endorse national development planning that implements strict control on foreign investment. This will be beneficial to the national macro-control, greatly lowering the number of blind and duplicated investment while at the same time optimizing one s industrial structure, making the debt an important way of controlling macroeconomic. Finally, the third effect that the public debt has on an economy is that debts will help improve the liquidity when it comes to international payments. The external borrowings are going to have a direct impact on the country s international income. Those earnings from foreign currency improve a country s payment capabilities and enhance international liquidity while giving a government the opportunity to invest into productivity. Developing the infrastructural key sectors, already mentioned above, and strengthening the export industries can contribute to the adjustment of the domestic industrial structure. They also increase the production of import substitutes, reduce import itself, thus increasing foreign reserve. Finally they can help in the production of exporting goods and enhance export capacity as well as the capacity of international payment. The negative effect of government debt on a However, the more debt the better will backfire on the lender. There is also a dark side to government debt. Actually, after the government debt surpasses a certain level, it will not remain a blessing to one s development. Excessive debt may depress the growth by limiting the productivity and weakening investment growth. Safia Shabbir talked about the dark side of external debt in his paper. He pointed out that developing countries should strive hard to achieve a sustainable economic growth. Therefore these governments need to gain control over their expending fiscal deficit. In contrast to that, if the government debt is not sustainable, it will put the economic prosperity into a risky situation. Since it should be remembered that the debt also hints at a higher current account deficit, which means the debt most *

2. DEBT CRISIS IN DEVELOPING COUNTRIES certainly could just as well lead to an unbalanced debt in a country. The debt for any economy is either a public or a publically guaranteed debt. It involves the contingent liabilities which play an important role in the cultivation of the entire economy. Developing countries usually have limited internal sources to yield their If they fail to utilize their debt productively, mobilize investment and create new employment opportunities; they will eventually get stuck up with the dilemma of lower revenue base which will affect their spending capacity, thereby leading to higher debt servicing. The inability to service debt on time not only makes it harder for developing countries to get aid at concessional rates with less conditionalities from donor agencies, but it also increases the country s risk. 5 This handicap will see to it that those governments that are unable to repay this debt will have to rely more on domestic borrowings. However, the more domestic borrowings are performed, the stronger domestic interest rate will increase; this then leads to a slowdown in the growth of the economy. 2.3 Causes of the debt crisis 6 (1) The development of developing countries over reliance on external debt Since the 1960s, Latin American countries as well as other developing areas across the globe turned more and more over to economic nationalism. As a result both the developing countries and the developed western countries prefer to choose loan capital as their principal means of capital input and output. The Latin American countries implemented an Import-substituting Industrialization strategy in the period from the mid-sixties to 1973. Therefore their manufacturing became more capital and technology intensive. This has lead to the development of these countries * Safia Shabbir, Does External Debt Affect Economic Growth: Evidence from Developing Countries. (,04B/14G;B40HB@#441.B#02.031H/03 Mengnan Zhu, International Finance, Chapter 7, Section 6, The international debt crisis. (

2. DEBT CRISIS IN DEVELOPING COUNTRIES relying more on import than export. Undue emphasis on import substitute brings about an internal-oriented economy and leads to shortage of internal funds. 7 Therefore the Latin American countries relied on loans for growth. These loans were used to pay for current consumption, but not for productive investments. The money was not being used to mobilize underutilized resources, but rather to maintain a current, albeit desperate, standard of living. In the same period, the western industrial countries were experiencing an economical depression. Their domestic demand was decreased and there was a large surplus of international capital. They therefore enhanced the loan capital export to developing countries. (2) The improper debt structure The structure of debt plays an important role in the changing of debt. The mainly impertinences of debt structure are: a. Commercial loans taking a too large proportion The term of commercial loans is usually short. The international bank wanted to continue lending to developing countries while the economic situation was still good. These countries could then use the new debt to pay off their old debt. However as soon as stable factors such as government deficit, a large adverse trade balance or political unrest appear, those involved lose their faith in the market. When the foreign reserves are insufficient to repay the maturity debt, the exchange rate is certain to plummet. When this happens the bank will no longer lend. In order to repay the maturity debt, the foreign exchange funds, which were already short, have to outflow, which leads to the explosion of a crisis. b. Excessive concentration of currencies used to buy debt. rate moveme external debt also increases and repayment becomes more difficult. I Mingde Li, The perspicuity encyclopedia of Latin American, P123, 2001. I

2. DEBT CRISIS IN DEVELOPING COUNTRIES c. Improper term structure of debt If short-term external debt occupies too large a proportion (beyond the international acceptable alarm level) or the repayment terms are not arranged rationally, then it may causes a concentration time for repayment. And if financial liquidity is not large enough to repay the maturity debt, this may lead to financial crisis. (3) Improper use of debt How to use the loan best guarantees the repayment ability. In the long term, solvency is determined by export rate. Therefore, what people are really worried about is not the scale of the debt, but its production capacity - and its capacity to earn foreign exchange. Some debtors lent a great deal of money but did not make the repayment strategy by considering their amount of investment, term of repayment or the development rate of macroeconomic. They simply built a number of huge and thoughtless projects. These projects usually lasted a long time, but could not get enough return in the short term to repay the existing debt. And there were also many debts are not used in production or to import capital goods but used instead to import durable goods and luxury. This caused a decrease in the investment rate and a also reduced ability to pay back. There are even some countries that took out a short-term loan, but used it on a long-term investment program such as real estate and stock market. This may cause a bubble economy, and as soon as the bubble bursts the crisis begins. (4) The deterioration of foreign trade caused a sharp cutoff in export income The capacity of earnings from foreign exchange trough exports determines a time according to the changing of the international market, then their export income will decrease and the current account deficit will increase. This has a serious impact upon their ability of debt service. At the same time the current account deficit &

2. DEBT CRISIS IN DEVELOPING COUNTRIES continues to cause more dependence on external debt. When the international investors lose faith in the debtors, they stop lending or they prevent a time extension for repayment, leading to the debt crisis. (5) Protectionism of developed countries developed western countries launched a series of policies and measures which raised the debt burden of the developing countries. Since the seventies, developed countries, taking America as their lead, practiced trade protectionism, causing the trading condition of Latin America to worsen. The trade deficit increased with the years, and as a consequence their ability to repay decreased. 2.4 Solutions of the debt crisis For the debt crisis of developing countries, which was caused by the failed management of debt risk, the international community designed several solutions: (1) The Sovereign Debt Restructuring Mechanism (SDR M) 8 After the Argentine crisis, the IMF (International Monetary Fund) proposed a sovereign debt restructuring mechanism (SDRM) in 2001. This proposal provided an essential forum to discuss the resolution. It introduced an international bankruptcy court which, similar to the bankruptcy statues for companies, which are. 9 The core characteristic of this proposed system is, the national government can request a convening of an international panel. This panel is in charge of negotiating with private creditors in order to arrive at an agreement for debt restructuring. If the majority of creditors reach an agreement, the rest of the creditors have to abide by it. 8, 9 Implementing the Monterrey Consensus in the Asian and Pacific Region: Achieving Coherence and Consistency, Macroeconomic Policy and Development Division (MPDD), 2005. J

2. DEBT CRISIS IN DEVELOPING COUNTRIES Another characteristic of this proposal is the limit of the lawsuit in suspending the debt repayment. It means that when the debtors and creditors therefore arrived at the debt restructuring agreement, the debtors temporarily stop paying back the debt, and the creditors cannot take legal action. The IMF tried to build a framework of orderly workouts by providing legal protection for debtors and putting macroeconomic policies in place at the same time. However, the Treasury Department argued against (2) Collective Action Clauses, C A Cs 10 in other G-10 countries and the US Treasury proposed a new approach which was more market-friendly than debt restructurings. It was not a substitute of the existing restructuring mechanism, but a complement of it. These clauses seek to address the holdout problem by allowing a supermajority of bondholders to am basic payment terms, removing the threat that a small minority of investors could forestall a restructuring effort. 11 Collective action clauses can avoid the rent-seeking wars of attrition which is in restructurings that are possible under the 12 Since 2003, most of the new issued sovereign debt introduced collective action clauses. pivotal voter may be used to eliminate the rent. 13 (3) Code of Good Conduct, C G C 14 While people were still arguing whether CACS or SDRM (IMF proposal), two 10 Collective Action Clauses: Recent Progress and Challenges Ahead, Sergio. J. Galvis, Angel L. Saad, 2004. 11 See Emerging Markets Creditors Association, Institute of International Finance. 12, 13 Sovereign Bond Restructuring: Collective Action Clauses and Official Crisis Intervention, Kenneth M.Kletzer, 2003 14, Towards a Code of Good Conduct on Sovereign Debt Re-Negotiation,!>

2. DEBT CRISIS IN DEVELOPING COUNTRIES sovereign debt restructuring mechanisms, is better a new proposal which is called CGC (Code of Good Conduct was proposed by the Banque France and the Institute of International Finance. This proposal may provide an acceptable solution which can support the concerned of all parties who have different interests and standpoint. The CGC does not replace either of the two but is used complementarily. The Code tried clarify a set of common principles. They are (1) Early and regular dialogue based on trust among debtors and creditors; (2) Make the information transparent; (3) Fair representation of creditors; (4) Comparable treatment of the different creditors; (5) Economic and financial conditionality of debt rescheduling; (6) Fair burden sharing between the different stakeholders; (7) Preservation, re-establishment or strengthening of normal financial relations between creditors and debtors; 15 These standardization principles make the debt restructuring more rapidly and orderly. However it against by debtors since it gives more power to creditors. (4) Solution from Institute of International Finance In June of 2004, the Institute of International Finance drafted Principles for stable capital flows and fair debt re 16 with the countries which are highly relying on international capital funding, such as Brazil, Mexico, Turkey and South Korea. Principles for stable capital flows and fair debt restructuring in emerging markets refers to taking precautions against and the solving of the external debt crisis. Compared to the CGC, it is more maneuverable. The main principles of the draft are that the debtor is obliged have an ideal economic policy, such as the monetary, exchange-rate and debt management policy. Further the public support for the policy, a supportive legal system and investment 15 Towards a Code of Good Conduct for Enhanced Prevention and Resolution of International Financial Crises, Baanque de France Bulletin Digest, 2003. 16 Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, 2004 -a582-431c-91d9-!!

2. DEBT CRISIS IN DEVELOPING COUNTRIES environment is needed as well. Furthermore the debtor has to share the economic and financial information about the region at that time and keeping the information transparent. Finally the creditor should make assumption about the risks of lending capital and should not expect a government bailout. Meaning, the creditor has to keep on improving its investment and risks management policy, including multi analysis of mic and fiscal policy. Financial institutes, especially the IMF, should provide international public goods, such as information on e.g. macroeconomic fundamentals, equity gaps, optimal debt structures, but also on financing for both sides who participate the sovereign debt restructuring. 2.5 Policy suggestion In order to improve the policy system and avoid further debt crises in developing countries some policy suggestion will be given out in this section. The Macroeconomic Policy and Development Division to developing countries provided some suggestions concerning this Consensus in the Asian and Pacific Region: Achieving Coherence and. 17 It is more advantageous for nations to consider debt finance a reliable source for developing country's financial infrastructure. In order to do so, one must first determine the four most essential elements that need to be put into consideration. (a) the country level; (b) the bilateral level; (c) the regional level; (d) the global level. 18 a. Country Level A macroeconomic resilience is highly dependent on its durability, which is assured by its sustainability. Attention should be paid to the monetary, fiscal and exchange!i 5!& Most result of this section comes from the article Implementing the Monterrey Consensus in the Asian and Pacific Region: Achieving Coherence and Consistency, Development Division,, 2005.!% Macroeconomic Policy and

2. DEBT CRISIS IN DEVELOPING COUNTRIES rate policy coherence as well as pervasiveness. Especially the development of the public sector s fiscal deficits should be eyed carefully. To assure a prosperous economic advancement, special caution is advised when considering the liberalization and deregulation of markets. Even though these factors may result in a higher productivity, they might have a negative effect on an economy without proper sequencing being performed. Another factor to be taken into consideration is the creation, promotion and or prosperity of the domestic as well as the government bond and derivative markets, the latter being needed for risk management. It is important to, as much as possible, neglect short-term borrowings and focus on building a surrounding benefitting long-term investment. When, however, deciding to venture into short-term debt, it is of utter importance to invest into an effective monitoring mechanism auditing the flow of capital. An inacceptable option however is investing into speculative short-term capital. These can be prevented by altering one's tax system and caps, as well as intelligently handling the debt by duration, by implementing maturity restrictions, when confronted with an overwhelming amount of short-term debt. Instead the creation of a safeguard against foreign contingencies is the key to sustainability. This can be done by monitoring the situation of major currencies and managing foreign reserve portfolios. Keeping a suitable level of foreign reserves is therefore a necessity. A government should also seek to, as often as possible, do unscheduled repayments of loans which will prevent overly high costs and interests as well as redistribute the existing high-cost debt, which are neglectable, without providing further expenses, such as penalties. This should however only be performed if these actions show no effect on the maturity rate of the debt. If foreign aid is available it is wise to utilize the money for the progression of one's economy and abbreviate the expenses of the capital. Again, precautions should be made. Systems that give out warning in advance about uncertain deals as well as sustainability analysis see to it that!'

2. DEBT CRISIS IN DEVELOPING COUNTRIES everything will remain bearable for the debtor. In order to keep track on these elements, sufficient computerized data on several sectors, such as the contingent liabilities of the public, the external and internal, as well as the public and private sectors, are of utter importance. These will help make up an effective institutional outline for an accurate and punctual provision of information. This means that that the country s economy has to become as transparent and adjacent to international standards as possible. Additionally good governance should cling to minimizing and downsizing loans while also effectively handling loans. An administration therefore has to support set ways of handling and organizing the coordination of debt management. b. Bilateral level Invest in the accession of concessional resources, including grants to emerging and developing economies, especially the ones of the Least Developed Countries and for those regions focusing on commodity-trade-dependent. c. Regional level Even if a general economic outline might already exist, it should nevertheless be questioned, challenged, improved and adjusted, thus enabling the provision of aid for those regions having severe troubles managing and obtaining capital on the international platform. A higher calibration of regional bond markets can be achieved by strengthening the standardization of issuance and settlement procedures. These will serve the purpose of stability. In order to do so, it is advised to better up the collaboration of different regions by participating in more summits and living up to pre-arranged agreements between the different countries in the World. This will improve capabilities of the debt management. Experiences and observations in the handling and managing of loans but also the risk management are important to advance into higher levels. Apart from this, do not neglect but instead find out more and more ways to efficiently operate the region s foreign exchange reserves. For this!)

2. DEBT CRISIS IN DEVELOPING COUNTRIES the Chiang Mai Initiative (CMI), in all its forms, as well as a properly done investment into technical assistance in debt management, deliver a powerful tool of all-around support to keep financial crises at bay. 3 Debt sustainability in developing countries The debt crisis that occurred before brought severe damage to the economies of the countries in a developing state. Such as, it reduced the incomes and increased the unemployment rates. The 1980s Latin American debt crisis is even referred to as Therefore, from the economic point of view, there is a very important question that definitely needs to be asked: Are the governments of the developing countries pursuing a sustainable debt policy after they experienced a debt crisis or not In this Chapter, six selected developing countries will be tested. We will try to find out if these governments pursued sustainable debt policies after they experienced the debt crisis. First, let us take a look at some theoretical considerations. 3.1 Theoretical considerations If the interest rate r is assumed to be constant, the accumulation of the public debt can be described in continuous time by the equation (1): D () t r( t) D( t) S( t), (1) Where here D() t is defined as the real public debt and r() t is defined as the real interest rate, while S() t is the real government primary surplus which exclusive to interest payment on public debt. We say that a government can be considered as following a sustainable debt policy if the present value of public debt converges to zero asymptotically, this, under the condition that a Ponzi game is not played.!*

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Solving equation (1) gives, t t r ( ) d t - r ( ) d 0 t 0 t D e D e d t ( (0)- S( ) ) (2) t 0 We define s() t S()/ t Y() t which can be chosen by any government. The debt to GDP ratio is described as d() t D()/ t Y() t, in which the primary surplus to GDP ratio is a positive linear function of the debt to GDP ratio. t is a stochastic error term (Bohn (1998). The -smoothing model. (Barro (1979) and Bohn (1998)). This tax smoothing rule comes out of an optimization problem. The result is the optimal taxes should be constant over time. With a constant tax, the primary surplus is used as a counterweight to the impact of fluctuation in government revenues and expenditures. Equation (3) defined the primary surplus ratio s() t d() t t (3) is the coefficient that indicates how the changes in the public debt to GDP ratio affect the primary surplus ratio. t is a stochastic error term that is assumed to be bounded and able to represent various financial variables that have an effect on the primary surplus ratio. These can be, for example: social spending and transitory government. (Greiner, Public debt and economic growth P.7). ent can be described by a stochastic differential equation, (Kloeden and platen(1995), p.76) t dd (() r t ()) t D a () t dw, (4) t t 1 t W here is a Wiener process ( W ~N(0,1)), t 0 and a () 1 t is the diffusion. t!(

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES 0 t Solving equation (4) and multiplying both sides by e t t - r ( ) d t t- r ( ) d t - r ( ) d ( ( ) ) 0 t - t 0 t e Dt e D 0 t e a1 dw t 0, we can get,, (5) At time t 0 t, public debt D 0. And the sustainability holds if t 0 t r ( ) d 0 t limt e D t 0 According to equation 4, if we expected the present value of public debt converges to zero for t. must to be positive 19. Otherwise if the is negative the path of public debt will not be sustainable. Therefore, the estimations coefficients hand out important indicators on how the government deals with public debt. And the sustainability of the path of the fiscal policy can also be known by this estimation. However, the positive coefficient does not guarantee that the debt relative to GDP ratio remains bounded. The countries characterised by rising public debt to GDP ratios seems to never pursue any sustainable policies, The EU economies could be taken as an example here ( see Fincke and Greiner (2008)). But if we put the -term economic development into consideration, and do not neglect the fact that a limit for the primary surplus to GDP ratio exists (the primary surplus is not capable of surpassing the GDP within a set period of time), we should come to the conclusion that the debt-gdp ratio will have to be constant. 20 Therefore, additional tests need to be performed, especially for those countries that have a tendency of having a positive debt-gdp ratio. Trehan and Walsh suggested in 1991 that testing the stationary for the public deficit including payments. By their proposal the path of public debt is sustainable, if the deficit including interest payments is stationary, and if under the condition that the interest rate is not negative.!j K0/71B-#;441191BB#2-K#2.=156;H/17L/1#21/5%>!>$ %> 91BB#2-K#2.=156;H/17L/1#21/5%>!>$!I

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES linearly asymptotically converges to zero if it is discounted with an exponential factor. 3.2 Data description Due to the fact that we want to analyze the debt situation of developing countries after the debt crisis which occurred in the eighties of the twentieth century, and also due to certain data availability issues, meaning to say the partial unavailability of such, our study solely focuses around a relatively small sample consisting out of six developing countries. The prime source of data for basic variables used, such as nominal GDP, real GDP, public debt, primary surplus, government expenditure, GDP deflator, interest payment, external debt are all taken from the EIU (Economist Intelligence Unit) country data. Apart from that, it should be mentioned that all of these data are annual. Furthermore we define the public debt as being the sum of the domestic debt and the foreign debt. 3.3 Empirical Analysis Based on the theoretical considerations which we mentioned earlier, we will apply these testes on the following developing countries now. The countries we will have a closer look at are, in chronological order, China, India, the Philippines, Colombia, Brazil and finally Chile. All of these nations are countries on the verge of becoming more industrialized and therefore economically more relevant. The reason why I chose these countries is because they share another similarity; all of these Latin American nations, without any exceptions, as well as India have been severely affected and extraordinarily overwhelmed by the 1980s debt crisis. However, since this group primarily consists out of South American countries, I decided to add another two Asian nations, China and Philippines who are also facing a high debt burden.!&

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES, which were calculated and then formed by using the World Bank Atlas Method. According to the 2008 GNI per capital the groups are: low income, $975 or less; lower middle income, $976 - $3,855; upper middle income, $3,856 - $11,905; and high income, $11,906 or more. By this classification, Colombia, Brazil and Chile are in the upper middle income group. And China, India and Philippines are in the lower-middle income. Among these countries, even though Chile, like all the other countries, is facing a high debt, it managed to find a remarkable and sustainable way to reduce it. China on the other hand drastically increased its debt ratio prior 2002 and kept this high level of above 54 per cent after that. The initial debt ratio for India are low, but has increased rapidly at the end of 1990s. The public debt ratio of the Philippines, increased to almost 25 per cent from year 1994 to 2004, however in 2007 they were able reduced the debt ratio to the same level as it was in 1994. Both Brazil and Colombia experienced an increasing for public debt before year 2002, and had been reduced after that. These different states and situations see to it that these countries are the perfect candidates for this analysis. As we mentioned before, the analysis is based upon the tax smoothing hypothesis. This meaning that the primary deficit is supposed to help to smooth out the revenues and expenditure variations. This is to ensure and maintain a steady and even tax rate. So the non-debt determinants of the primary surplus are the level of temporary government spending, Gvar, and the business cycle indicator, Yvar. Thus, the model for the primary surplus to GDP ratio is s=c+ t 0 d(t-1)+cgvar+cyvar+ 1 2 (t) (6) Yvar is the business cycle indicator. It gives the deviation of real GDP from its trend which it gets by using the Hodrick-Prescott filter. Suppose the Yvar obtains positive value, the country is experiencing booms. However, if the value falls down to the negative value, the nation is facing financial recession. Gvar indicates the deviation!j

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES of the real public spending from its normal value. It is calculated as * GVar t=(g t-g t) where G t is the public spending and * G t being its trend which obtained from the Hodrick-Prescott filter. The positive value of Gvar indicates that the expenditures are above the normal level and vice versa. (t) is the error term, we assumed it i.i.d 2 N(0, ). (Bohn(1998)] The equation (6) will be regressed by Ordinary Least Squares (OLS) estimation. This method may provide us with biased standard errors and t-statistics, since there exists the possibility of heteroskedasticity and autocorrelations between the residuals. concerns about heteroskedasticity and autocorrelation. For the additional test, we will figure out if there is a detectable stationary process going on inside the real deficits. There exist several possible approaches to this, we will rely on the Augmented Dickey-Fuller testing method. The null hypothesis says that any given time series has a unit root. Additionally, the alternative hypothesis states that the examined series is a stationary process. (For more information see for Enders(1995), Chapter4, pages 211-267). H 0 : 0 versus H: 1 0 There are three types of models specified: without drift and trend, with only a drift and with drift and trend: DEF DE F DE F k t t 1 j t j t j 1 DE F + DE F DE F t 0 t 1 j t j t j 1 k DEF + DEF t DEF t 0 t 1 2 j t j t j 1 Which model to use greatly depends on the data generating process. In order to use the correct one Enders (2005) provided a guideline for the selection of such. k %>

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Concerning the suitable amount of lags, we applied the Schwartz Info Criterion. The real deficit DEF inclusive of interest payments is defined as being the first difference of the level of real total debt. For the real debt level, we divided the public debt by the GDP deflator. And for the public debt, we take the sum of the foreign and domestic debt. All estimations are done with EViews (Version 6.0) and the first test estimates with provided to address potential concerns about heteriskedasticity and about autocorrelation. For each country we will start off by presenting their fiscal situation. Afterwards their reaction to the primary surplus in respective to the GDP is tested concerning divergences in the public debt to GDP ratio. Finally we will analyze indicators for these phenomena and additionally examine the stationary properties of the deficit inclusive of interest payments. 3.3.1 China China not only has the fastest-growing major economy in the world right now, but it was able maintain this status for the past 30 years with an average annual GDP growth rate of over 10 percent. It can be seen in figures 1 and 2, where the public debt to GDP ratio as well as the Primary surplus to GDP ratio of China for the year from 1991 to 2009 is depicted. %!

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES.28.010 Public debt relative to GDP.24.20.16.12.08.04 92 94 96 98 00 02 04 06 08 Time Primary surplus relative to GDP.005.000 -.005 -.010 -.015 -.020 -.025 92 94 96 98 00 02 04 06 08 Time Figure 1: Public debt to GDP ratio for China Figure 2: Primary surplus to GDP for China In the beginning of 1990s, the Chinese government was confronted with a low debt to GDP ratio consisting of only 5.9 per cent. However, this debt ratio drastically increased starting in 1997 and reached its peak of 27 per cent by the year 2000, thus being almost 4 times of higher than in 1991. The rapid increase of the public debt ratio halted in the last quarter of 1998 and started declining from then onwards. Apparently, this seems to be the result of a global credit contraction as well as the he CNY( the Chinese Local Currency). As can be seen in figure 2, the primary surplus ratio apparently displays the reversed image of the debt ratio trend as depicted in figure 1. It seems that the primary surplus ratio of China rapidly and drastically decreased from 1997 to 2000. This high ratio of public debt and low ratio of primary surplus might be ascribed to the Asian financial crisis which began in 1997. After the crisis, the Chinese government implemented an active fiscal policy for the following 7 years. During that period primary surplus reached a low climax in 2002. %%

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES.010.005 Primary surplus ratio in t.000 -.005 -.010 -.015 -.020 -.025.0.1.2.3 Debt ratio in t-1 Figure3. st VS. t 1 d for China Concerning the relationship between primary surplus and debt ratio, figure 3 shows a rather weak but negative correlation between the primary surplus and the debt. According to Figure 3 and the highly debt level of Chinese government, a negative coefficient may be expected. Next, we will start applying the first testing method on China to examine how the changing of the public debt ratio affects the primary surplus ratio. The outcomes can be seen in table 1. %'

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Coefficient Sand.error (t-stat) Pr(>t) Constant -0.003183 0.000891(-3.573344) 0.0031 b(t-1) -0.028021 0.005669(-4.942984) 0.0002 Gvar(t) -3.63E-0.5 2.68E-0.6(-13.57466) 0.0000 Yvar(t) 2.70E-0.5 2.05E-0.6(13.16979) 0.0000 D W: 2.138 2 R (adj): 0.943 Table 1: Coefficients for equation (6) for China Table 1 show that the coefficient of the lagged debt ratio () t is negative and highly statistically significant at a 1 per cent level. The negative reaction of public debt ratio to primary surplus ratio indicates that the Chinese government may not implement a sustainable debt policy. Furthermore the coefficient of the business cycle variables and public spending variables are also negative, both of them being statistically highly significant. This means that the increasing of public expenditure indicates a decline in the primary surplus to GDP ratio. Furthermore boom also leads to a decrease in primary surplus to GDP ratio. The goodness of fit parameter 2 R (adj) is 0.943, which shows the good fit of the model. The Durbin-Watson (DW) test statistic is 2.138. It indicates that there is no correlation between the residuals. If we estimate the equation (6) again without YVar and GVar or only with the b(t-1), the coefficient for the public debt ratio remains negative and significant at least at the 10 per cent level. (See appendix for the results). To attain more pieces of information concerning the financial situation of China, interest payments to GDP ratio can be taken as another illuminative indicator. In 1991 the interest payment to GDP ratio for China was 0.879 per cent, but reached 0.638 per cent in 1999 and decreased to 0.2 per cent in 2008. (EIU database). If we %)

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES only focus on the external debt however, the index which indicates the financial resources that are going abroad and if we are going to encounter the average external debt to GDP ratio for China within the same time span, we estimated it is 11.62 per cent with an overall, decreasing trend. It started out at 14 per cent in 1991 and moved downwards sharply between the years 2005 and 2008. In the end it reached 9 per cent. These ratios supplement some other vital pieces of information concerning the economic situation for developing countries, so the figures presented are important. The second examination investigates on the stationary of the budget deficit according to Trehan and Walsh, and can be tested by applying the Augmented Dickey Fuller test. The public debt can be considered as sustainable if the total government deficit is stationary, unless the interest rate is negative. (Greiner and Finc because the present value of public debt asymptotically converges to zero when The result of Augmented Dickey Fuller test is giver in table 2. Model: None Lags: 0 Prob. Test statistic: -2.452929 0.0177 Table 2. ADF Test result for China %*

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Table 3. Correlation test for residuals As can be seen in table 2, the deficit of the Chinese government is stationary and highly significant at a 1 per cent level. (The critical level can be derived from Fuller (1976) table 8.5.2 on page 373 and Dickey and Fuller (1981) on page 1063 tables, and ). For the possible autocorrelation between the residuals, the ACF PACF and Box-Ljung test are applied. As can be seen in table 3, all the autocorrelation tests show that there is no evidence for any correlation of the residuals in this specific case. Therefore, looking at the result shown in the second test, it seems the public debt of China maybe sustainable for the period which we test. Since the results of the two tests vary greatly, we need to deeply discuss the debt sustainability of China. Debt crisis are usually caused by inadequate liquidity. However, China shows adequacy in both the local currency market as well as the foreign currency market. %(

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Short- Short-term/F Debt service Foreign Debt term debt oreign ratio Ratio proportion Reserve 2007 58.9 10.8 2.0 27.8 2008 56.3 14.4 1.8 23.7 Internationally 25 100 20 100 Accepted alarm level Date source: State Administration of Foreign Exchange of China (1) Debt servicing ratio=(debt service payments (principal + interest)/ export earnings); (2) Foreign debt ratio= External debt/export earnings Table 4 Debt safety index for China Looking at table 4 we can see that the short-term debt ratio is clearly above and beyond the 25% margin of the internationally accepted alarm level. It should be mentioned however, that the other debt safety indexes are all significantly below that rank. Especially the foreign reserve which, being 9.2 times that of the short-term debt, matured the same year, to 5.2 times the size of the external debt at the end of in 2008. And although being affected by the global financial crisis, meaning that the cross-border capital flows import clearly decreased, the total cross-border capital was nevertheless left in a net inflow status. In the fourth quarter of 2008, an amount foreign reserve. In 2009 this new total amount was yet again increased by another additional 7.7 billion US Dollars in the first quarter. Both the foreign trade export as well as the import deteriorated during the first quarter of 2009, but were still able to come off at 62.3 billion dollar of trade surplus, meaning the surplus nevertheless increased. Meaning it was 15% higher than the year before. From what we analyze shows a high ability to international liquidation. China is not at a risk of debt crisis. %I

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES sustainability being, as expected, rejected by the raise of the debt to GDP ratio over the whole period. However, the outcome of the second test and the analysis about the ability to international liquidation that followed thereafter, it is safe to say that China is not at risk of suffering under a debt crisis. 3.3.2 India After the China the next country to be analyzed is India, the seventh-largest country lo dollar margin, elevating it to the position of the eleventh-largest economy in the world. The results of putting the GDP ratio of India in direct relation to primary surplus as well as the public debt, from the years 1994 to 2010 are respectively portrayed in figures 4 and 5..62.01 Public debt relative to GDP.60.58.56.54.52.50.48 Primary surplus relative to GDP.00 -.01 -.02 -.03 -.04.46 1994 1996 1998 2000 2002 2004 2006 2008 -.05 1994 1996 1998 2000 2002 2004 2006 2008 Time Time Figure 4: Public debt to GDP ratio for India Figure 5: Primary surplus to GDP ratio for India Figure 4 shows a fla the years of 1996 and 2002. This ratio was only at 46 per cent in 1996 and kept augmenting until it reached its peak at 62 per cent in 2002. After that, it experienced a slight decline stopping in 2007. The overall trend of the primary surplus relative to %&

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES GDP ratio prior 2007 shows a definite increase, while having three short setbacks, ranging from 1997 to 1998, 1999 to 2001 and 2004 to 2005. Afterwards the primary surplus to GDP ratio starts declining in 2007 and have be reduced to a mere -3 per cent in 2009. The general ascension within the primary balance to GDP ratio before 2008 may be ascribed to a rule- ch the government of India embraced. -generational equity both in fiscal management as well as in the fiscal sustainability, making it an inevitable, vital factor ensuring a balanced long-term macro-economy. Apart from that, India states has also been encouraged by the Twelfth Finance Commission (TFC), to create and execute their own fiscal responsibility laws (FRLs) by bringing their own conditional debt restructuring and interest rate reliefs to life. ( s experienced with fiscal rules, IMF)..01.00 Primary surplus ratio in t -.01 -.02 -.03 -.04 -.05.44.48.52.56.60.64 Public debt in t-1 Figure 6. st VS. t 1 d for India If we take a look at the scatter plot in figure 6, a weak positive relationship between the lagged debt ratio and the primary supplies ratio can be seen. It is possible that a %J

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES positive coefficient might be the outcome of the first test. 1994 to 2009. The aim being to examine is how the primary surplus to GDP ratio responds towards alterations within the public debt to GDP ratio. The estimated results are given in table 5: Coefficient Sand.error (t-stat) Pr(>t) Constant -0.06126 0.03204(-1.9116) 0.0823 b(t-1) 0.08270 0.056908(1.5159) 0.1577 Gvar(t) -1.35E-0.5 4.46E-0.6(-3.057781) 0.0109 Yvar(t) -1.08E-0.6 3.54E-0.6(-0.3055) 0.7657 D W: 1.68 2 R (adj): 0.49 Table5: Coefficients for equation (6) for India Looking at table 5, we can see that we got a positive coefficient for the public debt ratio. However it is not significant at the usual levels. The coefficient for business cycle variable and spending variable are both negative, which indicates that the primary surplus ratio decreases when the real GDP is above its normal values and the more public spending reduces the primary surplus ratio. The Durbin-Watson test If our estimation is done once more without expenditures, and without the business cycle variable or only with the lagged public debt to GDP ratio, the coefficient for the public debt ratio is still positive and is only significant when the estimation is performed with only the lagged debt to GDP ratio variable. (See appendix for results). Consequently sustainable policy within the period we have analyzed. Once again the supplementary insight on the economic situation of India is given by '>

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES the interest payments to GDP ratio and external debt to GDP ratio. The interest payment shared 4.2 per cent of GDP in 1997, 4.5 per cent in 2002 and 3.5 per cent in 2007 (EIU country data). Although the ratio holds a relatively high value at the beginning, it shows a decreasing trend. The external debt to GDP ratio shows a clear overall decreasing trend. It is 20 per cent in average for the same period as shown in the estimation we made earlier on. This decline started with 22 per cent in 1997, moved to 20 per cent in 2001 and finally reached 18.6 per cent in 2007. The decreasing trend supported the result of our first test. Next, we will apply the second testing procedure for the stationary properties of budget deficit including interest payments of India. The second test will investigate even further on that same time period we have been talking about so far. Again, the deficit is the first difference of the level of the real public debt. The public debt is calculated as the sum of domestic debt and external debt. Model: Constant Lags: 0 Prob. Test statistic: -3.897106 0.0121 Table 6: ADF test results for India '!

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Table 7: Correlation test for residuals According to the results which are shown in table 6, the deficit of Indian government is stationary at a highly significant level. The ACF, PACF and Box-Lujung test are being applied to look for the possibility of autocorrelation between the residuals. From the results given in Table 7, all the autocorrelation tests show that there is no evidence for correlation between the residuals. As a conclusion, the results from the first test show that there is a positive correlation between primary surplus and lagged public debt, however it is not significant. And according to the outcome of the second test, the real budget deficit for India is stationary. Thus, it is possible to conclude that the Indian government performs a sustainable debt policy. All in all, despite a slowly growing debt ratio prior 2002, both test results conclude that there are indications for sustainability. However the significance is small and the results only allude to the time period considered. 3.3.3 Philippines: The third Asian country that we will examine is the Philippines. The Republic of the Philippines located at the easternmost end of Southeast Asia in the western Pacific Ocean. Being a newly industrialized country, Philippine economy has been '%

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES transitioning from being based almost solely on agriculture to relying more and more on the service industry as well as manufacturing. The figures 7 and 8 will help bringing a better understanding of the public financial situation of the Philippines, by presenting the public debt and primary surplus to GDP ratio from the years 1994 to 2007..80.07 Public debt relative to GDP.75.70.65.60.55 Primary surplus relative to GDP.06.05.04.03.02.01.00.50 1994 1996 1998 2000 2002 2004 2006 -.01 1994 1996 1998 2000 2002 2004 2006 time time Figure 7: Public debt to GDP ratio for the Philippines Figure 8: Primary surplus to GDP ratio for the Philippines As can be seen in figure 7, the debt ratio reached a high value between 2002 and 2004. After several fluctuations between the years 1994 and 1998, the debt ratio increased sharply and reached its peak in 2004, where it halted at 78 per cent. Afterwards a drastic decrease started from in the same year. The debt ratio of the Philippines was reduced to almost the same level as it was in 1997. One of the outcomes of the increasing public debt at the beginning of this period, the primary surplus to GDP ratio fell from 6 per cent to almost the negative. And its increasing at the end of the period might explain the decrease of public debt during those years. It seems most likely that the decrease of primary surplus is the result of the Philippine national government devaluing the revenue effort. The weakening of the revenue effort is, at the same time, linked to the deteriorating tax effort, despite the fact that non-tax revenues are dipped as well. The overall tax effort in the Philippines collapsed from its peak at17.0 per cent of GDP in 1997 to 13.9 per cent in 2000 and afterwards decreased even further down to 12.3 percent in 2002. (Policy notes, ''

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES 2004).07.06 Primary Surplus ratio in t.05.04.03.02.01.00 -.01.5.6.7.8 Public debt ratio in t-1 Figure 9: st VS. t 1 d for the Philippines Figure 9 shows a weak negative relationship between the primary surplus and lagged public debt. Next, we are going to estimate an equation (6) for the Philippines for the years 1994 to 2007. The public debt and primary surplus are wherefore put into correspondence to the GDP, with the results being presented in table 8. Coefficient Sand.error (t-stat) Pr(>t) Constant 0.02634 0.028885(0.9106) 0.3862 b(t-1) -0.007898 0.042378(-0.1863) 0.8563 Gvar(t) -0.000349 0.000133(-2.61952) 0.0278 Yvar(t) 0.000702 9.69E-05(7.2501) 0.0000 D W: 1.855 2 R (adj): 0.626 Table 8: Coefficients for equation (6) for the Philippines ')

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Results in Table 8 show the coefficient for the public debt variable being negative but not statistically significant at the usual levels. The outcome of the estimation policy for the sample period which we investigated on. The coefficient of public spending is negative as well, which means that the rises in the public spending parameter lead to a decline of the primary surplus to GPD ratio. The coefficient of the business cycle is the only one which is positive and highly significant. This expresses that the booms bring up a positive effect on the primary surplus to GDP ratio. Further, the 2 R (adj)=0.626 gives a fair goodness of fit. The Dubin-Watson(DW) statistics (1.855) show, there is no correlations of the residuals. If the estimation is performed without the expenditures variable, the coefficient of the public debt ratio turns positive, however it is still not significant at the usual levels. If we perform the estimation now without the business cycle variable or only with the lagged public debt to GDP ratio variable, the coefficient for the public debt remains negative while at the same time not being significant. (See appendix for the results.) Just like what was done for India, we calculate several economic figures for the Philippines to gain a broader spectrum of pieces of information about their financial situation. Concerning the interest payments to GDP ratio of the Philippines they are at 3.3 per cent in 1994, rise to 3.9 per cent in 2000 and 4.3 per cent in 2004 but fall down to 2.8 per cent in 2007. Although the interest payment to GDP ratio decreased during the last year of the period we looked at, a high level still remains within the years 1994 to 2006. Moreover, the average value of the external debt to GDP ratio which is calculated for the same period which is estimated for the last test. It was at 49.4 per cent. The high values of external debt to GDP ratio support the estimation result from the above test. We apply the Augmented Dickey Fuller Test to the budget deficit of the Philippines to obtain additional information needed for the analysis. The budget deficit is '*

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES calculated to be the first difference of the public debt which is made up of the sum of the domestic debt plus the external debt. The results are shown in Table 9. Model: Trend Lags: 3 Prob. Test statistic: -2.340580 0.3706 Table 9: ADF Test results for the Philippines Table 10: Correlation test for residuals The results from table 9 support the outcome of the first test. The budget deficit of the Philippines is not stationary at any significance level. We used the ACF and PACF test for the possible correlation of residuals as well as the Box-Lujung statistic Q is calculated as well. According to results, which are shown in table 10, there are no indications of the autocorrelation. Therefore, to sum up the results of both tests, it is doubtful whether an inter-temporal budget constraint holds and whether a sustainable fiscal policy has been pursued by Philippines government. All in all, both tests support that the sustainable debt policy seems not to be given by Philippines government. 3.3.4 Colombia Next up on the list is Colombia. Just like before the first graphs, here figures 10 and 11, depict the public debt and primary surplus to GDP ratio for Colombia for the '(

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES years 1996 to 2009..7.04 Public debt relative to GDP ratio.6.5.4.3 Primary surplus relative to GDP.03.02.01.00.2 1996 1998 2000 2002 2004 2006 2008 -.01 1996 1998 2000 2002 2004 2006 2008 Time Time Figure 10: Public debt to GDP ratio for Colombia Figure 11: Primary surplus to GDP ratio for Colimbia Based on the results of figure 10, it is clear to see that the public debt to GDP ratio is comparatively low in 1996, where it was only at 26 per cent. After that, the debt ratio increased quickly and reaching 63 per cent in 2002, which is more than two times of higher than the ratio in 1996. The debt ratio decreased slightly after year 2002 and reduced to 43 per cent in 2007. Turning to the Primary surplus ratio, it kept a rather low level prior 2002. It even reached a negative value in 1997, 1998 and 1999. The decreasing of the public debt to GDP ratio after the year 2002 is due to the strong economic performance which is contributed by the market-friendly economic policies. And the fiscal policies are guided by medium term fiscal plans, which enhance fiscal stability. (Erwin Blaauw, Country report Colombia,2009) The slightly increase in the public debt ratio and the decrease in the primary surplus may due to the global economic weakened. 'I

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES.04 Primary surplus ratio in t.03.02.01.00 -.01.2.3.4.5.6.7 Public debt ratio in t-1 Figure12: st VS. t 1 d for Colombia Concerning the relationship between primary surplus and public debt ratio, a slightly positive relationship can be observed from the scatter plot figure when the primary surplus ratio is less than 2 percent. Equation 6 is estimated for the years 1996 to 2009 analyzing Colombia towards the primary surplus ratio to public debt ratio. The outcomes of this examination are portrayed in the following table 11. '&

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Coefficient Sand.error (t-stat) Pr(>t) Constant -0.060546 0.014399(-4.205) 0.0023 b(t-1) 0.159496 0.0301(5.2908) 0.0005 Gvar(t) -8.9E-07 2.50E-07(-3.564762) 0.0061 Yvar(t) 1.80E-06 3.32E-07(5.42503) 0.0004 D W: 1.822 2 R (adj): 0.809 Table 11: Coefficients for equation (6) for Colombia As shown in table 11, the coefficient for public debt ratio is positive and highly significant at the 1 per cent level. Apart from the public debt ratio, the coefficient for the business cycle variable is also positive and statistically significant at any level. The spending variable, on the other hand, is negative but also statistically significant. It indicates that the higher public spending causes a lower primary surplus and the primary surplus, on the other hand, may rise when the real GDP is beyond its trend value. Moreover, the goodness of fit is given by 2 R (adj)=0.809 and Dubin-Watson(DW) statistic is 1.822, which shows that there are no correlations of the residuals. If this estimation is tested once more without the expenditures variable, without the business cycle variable or with only with the debt ratio variable, the coefficient of the public debt ratio is still positive and significant at least at the 5 per cent level.(see appendix for the results.) The interest payments and the external debt to GDP ratio are calculated to get further information on the financial situation of Colombia. Regarding the interest payments to GDP ratio for Colombia, they were 1.65 per cent in 1996, got elevated to 3.9 per cent in 2000 and keep around 3 per cent in 2008. (EIU Database). The average of the external debt to GDP ratio is 24.84 per cent for the same period as the earlier made estimations for Colombia. The low values of the external debt support our test 'J

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES results. To get further information, we apply the Augmented Dickey Fuller test to analyze the stationary of the budget deficit of Colombia. The data used for this is from the same period of testing done earlier, the years 1997 to 2009. Model: Constant Lags: 4 Prob. Test statistic: -3.666644 0.0365 Table 12: ADF Test for Colombia Table 13: Correlation test for residuals Taken from the results shown in table 12, the Colombia and significant at the 5 per cent level. This is ideal, since it strengthens the outcome from the previous done test. It seems that the inter-temporal budget constraint is being held by the Colombia government. The ACF, PACF have been checked for possible autocorrelations between the residuals. And the Q statistics from the Box-Lujung test show no evidence for correlation of these. Finally, despite the high value of the debt ratio before 2002, both tests come to the conclusion that the public debt for Colombia is an indication for sustainability during the period we have taken a look at. )>

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES 3.3.5 Brazil Another Latin American country we are going to take a look at now is Brazil. Brazil is not only the largest country on the South American continent, but at the same time also the largest national economy in Latin America. Apart from all that however, the nation was among those countries, which suffered the most under the consequences of the last debt crisis (1980s). To understand the financial situation of the target public debt and also primary surplus to GDP ratio from year 1995 till 2009..80.05 Public debt relative to GDP.75.70.65.60.55.50 Primary surplus relative to GDP.04.03.02.01.00.45 1996 1998 2000 2002 2004 2006 2008 -.01 1996 1998 2000 2002 2004 2006 2008 Time Time Figure 13: Public debt to GDP ratio for Brazil Figure 14: Primary surplus to GDP ratio for Brazil According to the figure 13, it is easy to observe that the public debt ratio for Brazil increased markedly in the period 1998 to 2002. According to Pedro Cavalcanti Ferreira (2006) stabilization and maybe also due to partial default in the conversion to Reais (Brazilian currency) of p (see for example Pedro Cavalcanti Ferreira(2006), especially page 6 ) The public debt ratio increased to 76 per cent of the GDP in the year 2002, when in 1996 it was only at 48 per cent. Meaning it was increased by 28 per cent. After that, a tremendous decline can be observed starting in the year 2003. Within the time span 2003 to 2007, there is a )!

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES continuation of that tight fiscal policy, with high interest rates and appreciation of the Reais. The manner in which debt is build up was rearranged also. Meaning, that system, the government decided to alter the composition of the domestic as well as the external debt. Dollar-denominated bonds, from 2006 onwards, made up no more than two per cent of the GDP. An increasing overall trend can be seen for the primary surplus ratio before the year 2008 in figure 14. The primary surplus was around 3.5 per cent in the year 2002 which was the result of shifting on all government levels. This way Brazil managed to halt the ascension process of its public to GDP ratio. Parallel to that fiscal adjustments were primarily achieved by drastic increases in taxation. (see for example Pedro Cavalacanti Ferreira(2006). However, after that there is a decreasing in primary surplus until 2009. According to the scatter plot, in which the primary surplus ratio is put against the lagged public debt ratio, a positive relationship can be observed between these two variables..05.04 Primary surplus ratio in t.03.02.01.00 -.01.4.5.6.7.8 Public debt ratio in t-1 Figure 15: st VS. t 1 d for Brazil Afterwards, we have estimated the equation (6) to examine whether or not a )%

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES sustainability debt policy was pursued by the Brazilian government after experiencing a severe cutback in the economy after a debt crisis. Coefficient Sand.error (t-stat) Pr(>t) Constant -0.053434 0.031251(-1.71) 0.1215 b(t-1) 0.1348 0.049063(2.747) 0.0226 Gvar(t) 9.87E-0.5 0.000111(0.893) 0.3952 Yvar(t) -6.03E-0.5 8.62E-0.5(-0.699) 0.5019 D W: 1.43 2 R (adj): 0.62 Table 14: Coefficients for equation (6) for Brazil As the results of table 14 show, the parameter of lagged public debt is positive, however it is only significant at the 5 per cent level (t-statistic=2.747). The Yvar variable, seen in the fifth row of table 14, here again indicates the business cycle. The negative coefficient values of the business cycle implicate that a economic growth, or economic boom, has had a negative effect on the primary surplus ratio of the nation. The spending variable shows favorable characteristics for Brazil, which indicate that a rise on the spending parameter causes an increase in the primary surplus. It should be mentioned however, that neither the business cycle nor the spending variable are significant at the usual levels. The goodness of fit of the model is displayed by a high 2 R (adj) of 0.54 and the possible correlations of the residuals by Durbin-Watson (DW) test statistic amount to 1.43. But it should not be neglected, that the test remains without an outcome, so that the correlation of the residuals is unexcludable. If the, on the other hand, the estimation were to be performed while excluding the YVar or GVar variables, or by only taking up the b(t-1), the coefficient for the public debt ratio remains positive and significant at the 5 per cent level. (See )'

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES appendix for the results). In order to attain further pieces of information on the financial situation of Brazil, the interest payments to GDP ratio and the external debt to GDP ratio will have to be calculated by us. The interest payment to GDP ratio presented an overall decreasing tendency. It was at 1.8 per cent in 1998, rising to a 2.21 per cent in 2004 and finally declined to 1.0 per cent in 2007. These numeric values remain steady, supporting the estimation results. The external debt to GDP ratio shows a similar trend but a low level when compared to the one of the public debt to GDP ratio. It was at 28 per cent in 1998, 42 percent in 2002 and shrank down to 15 per cent in the year 2008. This not only serves as a demonstration of the debt structure of Brazil, but also about the external debt share, if combined with the results of the outcomes shown in figure 13. Next, as proposed by Trehan and Walsh (1991), we apply the Augmented Dickey Fuller test to inquire the stationary of the budget deficit of Brazil. The data collected deals with the same time period that has been analyzed before in the last test. Once more, the budget deficit is calculated by computing the first difference, also referred to as level of public debt. The public debt, on the other hand, is the sum of domestic and foreign debt. It is sustainable if the budget deficit is stationary, unless a negative interest rate was held. The result of ADF test is given by table 15: Model: Constant Lags: 3 Prob. Test statistic: -4.001982 0.0177 Table 15: ADF Test for Brazil ))

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Table 16: Correlation test for residuals The results from table 15 support the findings of our last test. The budget deficit of Brazil is stationary at the 5 per cent significant level. And the ACF, PACF test results and Box-Ljung test Q statistics all indicate that there are no autocorrelations between the residuals. These results indicate that the Brazilian government may have taken hold on an inter-temporal budget constraint. To sum up the outcome for Brazil, the findings from both tests indicate that a sustainability of their fiscal policy has been pursued by the Brazilian government. However the significance is smaller than with the other countries which we tested before this. 3.3.6 Chile The last country that is to be analyzed is Chile, one of those regions deeply afflicted by the last debt crisis. The nation can be found in South America. One of its eco market-oriented. This way Chile managed to become the country with the highest nominal GDP per capita in Latin America in 2006. The public debt and primary surplus to GDP ratio of Chile for the years 1993 to 2006 are represented by the figures 16, 17 below. )*

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES.35.06 Public debt relative to GDP.30.25.20.15.10 Primary surplus relative to GDP.05.04.03.02.01.00.05 1994 1996 1998 2000 2002 2004 2006 -.01 1994 1996 1998 2000 2002 2004 2006 Time Time Figure16: Public debt to GDP ratio for Chile Figure 17: Primary surplus to GDP ratio for Chile Chile is prone to efficiently managing its debt. Its government was able to establish an advantageous rescheduling for paying back its 1991-1994 debt maturities to its mortgagees. As it shown in figure 16, there is a global declining trend in the public debt ratio in the period we observe. The initial value in 1993 was 31 per cent and it decreased sharply between the years 1993 and 1998. After a short increase from 1998 to 2002, the debt ratio decreases again and reaches its lowest level in 2007, with a debt ratio of merely 7 per cent. The performanc GDP ratio experienced a dramatic decline in the years 1998 to 2000. After a decade of impressive growth, an economic downturn was encountered by Chile. Causes for this were the severe economic conditions caused by the Asian financial crisis, which recovery, which can also be seen in figures 16 and 17. )(

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES.06.05 Primary surplus ratio in t.04.03.02.01.00 -.01.10.15.20.25.30.35 Public debt ratio in t-1 Figure18: st VS. t 1 d for Chile According to figure 18, a weak positive relationship between the primary surplus and the lagged public debt to GDP ratio can be observed in the scatter plot. As shown in the figure, after the debt ratio reached the 15 per cent margin a positive slope was noticeable. We apply the first test on Chile to analyze how its primary surplus ratio reacts to the changes of the public debt ratio for period 1993 to 2005. The results are shown in table 17. Coefficient Sand.error (t-stat) Pr(>t) Constant -0.0168 0.005841(-2.8763) 0.0206 b(t-1) 0.203263 0.026799(7.5846) 0.00013 Gvar(t) -5.80E-0.5 2.82E-05(-2.055) 0.0739 Yvar(t) 1.06E-0.5 1.70E-06(6.245) 0.0002 D W: 1.84 2 R (adj): 0.85 Table 17: Coefficients for equation (6) for Brazil )I

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES As presented in table 17, the coefficient for the debt ratio is positive and highly significant at 1 per cent level (t-statistic=7.5846). The variable for the business cycle as well as the expenditure variable are expected to be respectively positive and negative sign, and significant at usual levels for both of them. The high 2 R (adj) of 0.85 shows a good fit of the model and the Durbin-Watson (DW) test statistics of 1.84 indicate that there are no correlations between the residuals. If we estimate equation (6) once more without the business cycle or the expending variable, or solely rely on the lagged debt ratio, the coefficient for the public debt ratio is still positive and significant at least at the 5 per cent level. For receiving further information on the financial situation of Chile, the same interest payments to GDP ratio and its external debt to GDP ratio. The interest payments to GDP ratio made up 2.28 per cent in 1993, 1.36 per cent in 1997 and 1.35 per cent in 2006. The low level of interest payment supports the result of figure 16. Concerning the external debt ratio, it is averagely positioned at a 37 per cent of GDP for the same period which we analyzed before. And the same as the trend of public debt to GDP ratio, it started to decrease since year 2002. The Augmented Dickey Fuller test is used to analyze the stationary properties of the budget deficit which is inclusive of the interest payments. Here again, the budget deficit is taken by the first difference of the level of the real public debt, which is computed by the ratio of public debt to GDP deflator. Model: None Lags: 5 Prob. Test statistic: -2.362968 0.0267 Table 18: ADF Test results for Chile )&

3. DEBT SUSTAINABILITY IN DEVELOPING COUNTRIES Table 19: Correlation test for residuals From table 18 we can see that the budget deficit of Chile is stationary for the period which we test and it is significant at 5 per cent level. For the possibility of autocorrelation of the residuals, the ACF, PACF and Box-Ljung test was done for the considered period. The results in table 19 indicate that there are no autocorrelation of the residuals. The results show that an inter-temporal budget may be held by To summarize the analysis results for Chile we conclude that both of the test results show evidence for sustainability fiscal policy is pursued by that country. And the statistical significance is high. 4 Conclusion This paper studied the debt crisis as well as the debt sustainability in developing countries. Our discussion on the debt crisis in developing countries found out that there are five main causes for the developing countries debt crisis. (1)The development relying too much on external debt; (2) The irrational debt structure; (3) Improper use of debt; (4) Deteriorating situation in foreign trade causes the sharp cut off of export income; (5) Protectionism in industrialized regions. And apart from this, this paper also provided various possible solutions to solve the debt crisis and some policy suggestion are also given in developing areas. )J

4. CONCLUSION This thesis furthermore also tried to answer the question on whether or not the fiscal policies of those selected developing countries are sustainable after the debt crisis. We focused on countries that have suffered the most from the 1980s Latin American debt crisis and on those nations that have been identified of having a high debt to GDP ratio. In order for us to study if the inter-temporal budget constraint is being held by the government of our test subjects, we tested the sustainability of the debt policies in these selected regions by using two kinds of tests. Except the Philippines, most of our selected developing countries show a sustainability in there public debt. By empirical result, China came out with a negative test result for the first test, which means the coefficient for the debt to GDP ratio is negative and statistically significant. But the result of the second test showed us that the deficit of the Chinese government is stationary at a significant level. However after analyzed the reserve or capital flow, we can concluded that China is not in the risk of entering a debt crisis. Further we found out that the debt situation in India, Brazil, Colombia and Chile seems to be stable. We came to this conclusion because of the estimated coefficient being positive and the budget deficit of the government being stationary. We should also point out that the estimated coefficient for India should be taken up with caution since it is not statistically significant. In opposition to that, the results for both tests show that the sustainable debt policy may not be given by the Philippine government. Our results show that the Philippine government may has to perform some corrective measures and put effort into stabilizing public debt. However, these tests and results are also bound to have their limitations. Only some aspects of the developing countries have been put into consideration, while more elements may need to be acknowledged and a longer time span would need to be analyzed, to give out a complete outlook on the debt situation of these regions. *>

4. CONCLUSION Nevertheless, meaningful results have been observed here through the tests and give out an insight into the fiscal situations of those developing countries which we considered to analyze. *!

REFERENCES References Alejandro, S., Petia, T.,(2009) India s Experience with Fiscal Rules: An Evaluation and The Way Forward, IMF Working Paper. Andrew, B., Ben, S. (2001) Macroeconomics Ballabriga, F.C. and Martinez-Monagay, C. (2005) Sustainability of EU public finances. European Economy-Economic Papers, No.225, European Commission, Brussels. Bank France (2003), Towards a Code of Good Conduct on Sovereign Debt Re- Negotiation, Trichet-Proposal, Barro, R.J.(1979) On the Determination of the Public Debt. Journal of Political Economy, 87(5), pp940-971 Bettina, F., Alfred, G., (2010) Do the governments in developing countries pursue sustainable debt policies? Empirical evidence for selected countries in Africa and Latin America. Journal of Development Studies, PP. 745-770 Bohn, H. (1998) The Behavior of U.S. Public Debt and Deficits. Quarterly Journal of Economics, 113 (3),pp.949-963 Canzoneri, M.B., Cumby, R.E. and Diba, B.T. (2001) Is the Price Level Determined by the Needs of Fiscal Solvency? American Economic Review, 91(5), pp.1221-1238. Dickey, D.A. and Fuller, W.A (1981) Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root, Econometrica, 49 (4), PP.1057-1072 *%

REFERENCES Enders, W. (1995) Applied econometric time series (New York: Wiley&Sons). Emerging Markets creditors association, (2003) International Finance, International Primary Markets Association. Hong Zhao, (2006) The research on Chinese debt management system Halbert, W. (1980) A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity, Economitrica, 48 (4), pp 817-838. Kenneth M., (2003) Sovereign Bond Restructuring: Collective Action Clauses and Official Crisis Intervention, IMF Working Paper Kloeden, P.E. and Platen, E. (1995) Numerical solution of Stochastic differential equations (Berlin: Springer) Mengnan Zhu, International Finance, Chapter 7, Section 6, The international debt crisis Mingde Li, (2001) The perspicuity encyclopedia of Latin American, pp.123. Policy and Development Division,(2005) Implementing the Monterrey Consensus in the Asian and Pacific Region: Achieving Coherence and Consistency, No.: ST/ESCAP/2351, Economic and Social Commission for Asia and the Pacific. Rosario, G. (2004) The Philippines fiscal position: looking at the complete picture, Policy notes. 2004-07 *'

REFERENCES Safia, S, (2008) Does External Debt Affect Economic Growth: Evidence from Developing Countries. International Research Journal of Finance and Economics. pp. 1450-2887. Sergio, J., Angel, L., (2004) Collective Action Clauses: Recent Progress and Challenges Ahead, Georgetown Journal of International Law. Trehan, B. and Walsh, C.E (1991) Testing Intertemporal Budget Constraints: Theory and Applications to U.S. Federal Budget and Current Account Deficits. Journal of Money, Credit and Banking, 23 (2), pp.206-223. *)

INTERNET SOURCES & DATA SOURCES Internet Sources: Pedro,C.F., Marco,B.,(2006)The Political Economy of Public Debt in Brazil http://siteresources.worldbank.org/intdebtdept/resources/20061012_04.pdf Banque de France Bulletin Digest, (2003).Towards a Code of Good Conduct for Enhanced Prevention and Resolution of International Financial Crises, -france.fr/gb/pub Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets, 2004 http://www.icmagroup.org/icmagroup/files/78/78c3b39e-a582-431c-91d9-09bdaf World Bank (2008a) Data & Statistics, Country Classification. http://go.worldbank.org/k2ckm78cc0, last access on March 13 th 2008. Data Sources: EIU Country Data: Economist Intelligence Unit http://dataservices.bvdep.com.ezp.lib.unimelb.edu.au/version-2010629/cgi/template. dll?product=101&user=ipaddress **

ADDITIONAL ESTIMATION RESULTS Additional Estimation Results: The results of the estimate equation (6) test without Gvar, without Yvar or with only debt to GDP ratio for individual countries is given as fellow. 1.China A01HH#.#12B0HM1:B/-B#0 N/0:$ O#B@0GBL+-/ P>$>)*I >$!%J) O#B@0GBQ+-/ P>$>((( >$>>>! O#B@02;DM1:B/-B#0 P>$>*% >$>>>* 2.India: A01HH#.#12B0HM1:B/-B#0 N/0:$ O#B@0GBL+-/ >$!%!) >$!%%! O#B@0GBQ+-/ >$>J>*!( >$!!(J O#B@02;DM1:B/-B#0 >$!*)>J >$>!'' 3.Philippines: A01HH#.#12B0HM1:B/-B#0 N/0:$ O#B@0GBL+-/ >$>>(' >$&I)! O#B@0GBQ+-/ P>$>''& >$*&I! O#B@02;DM1:B/-B#0 P>$>)%% >$)!II 4. Colombia A01HH#.#12B0HM1:B/-B#0 N/0:$ O#B@0GBL+-/ >$!(('*I >$>>>% O#B@0GBQ+-/ >$>&IIJ) >$>!&* O#B@02;DM1:B/-B#0 >$>&')(' >$>>% *(

ADDITIONAL ESTIMATION RESULTS 5. Brazil: A01HH#.#12B0HM1:B/-B#0 N/0:$ O#B@0GBL+-/ >$!%(* >$>%>* O#B@0GBQ+-/ >$!)(' >$>!%) O#B@02;DM1:B/-B#0 >$!'&! >$>!>) 6.Chile: A01HH#.#12B0HM1:B/-B#0 N/0:$ O#B@0GBL+-/ >$%!') >$>>>* O#B@0GBQ+-/ >$!((& >$>>(! O#B@02;DM1:B/-B#0 >$!I() >$>>I) *I

Declaration Herewith I affirm that I have written this thesis on my own. I did not enlist unlawful assistance of someone else. Cited sources of literature are perceptibly marked and listed at the end of this thesis. The work was not submitted previously in same or similar form to another examination committee and was not yet published. Yunhe Qiu Bielefeld, 30.07.2010 *&