The other costs of high debt in poor countries : growth, policy dynamics, and institutions

Despite recent progress in reducing the external debts of many poor countries, there is a renewed focus on continuing problems related to debt. In particular, there is a growing concern that debt levels are unmanageable. The cost of poor countries high debt is typically analyzed in terms of the relative amount of resources utilized to service the debt and the diversion of those funds from other potential spending areas, such as health and education. This paper will seek to explain the cost of high levels of external debt for poor countries in three other areas: (a) the effects of various relative debt levels on investment and economic growth; (b) the impact of high debt on policies and the dynamics of policy reform; (c) and the influence of high debt on institutional development. In particular, the paper finds that high debts undermine donor selectivity and that low-income, high-debt countries face considerable administrative burdens that strain limited public sector management capacity.