R E S T R I C T E D FlE COpy Report No. EC-58 Public Disclosure Authorized This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. TNTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized DEBT SERVICING CAPACITY AND POSTWAR GROWTH IN INTERNATIONAL PUBLIC INDEBTEDNESS Public Disclosure Authorized August 27, 1957 Public Disclosure Authorized Economic Staff Prepared by: Dragoslav Avramovic DEBT SERVICING CAPACITY AND POSTWAR GROWTH IN INTERNATIONAL PUBLIC INDEBTEDNESS TABLE OF CONTENTS Page FOREWORD 1 SUMIlARY AND CCNCLUSIONS 3 PART I: CHANGES IN EXTERNAL PUBLIC INDEBTEDNESS DURING THE LAST DECADE I. SCOPE 12 II. PRESENT LEVEL OF INDEBTEDNESS AND ITS DISTRIBUTION 12 III. GROWTH IN INDEBTEDNESS 14 1. Postwar Borrowing and Principal Repayments 15 2, Effect of Devaluation and Settlement of Foreign Claims on Growth in Indebtedness 18 3. Changes in Debt Outstanding 19 IV. PRESENT LEVEL AND POSTWAR GROWTH IN DEBT SERVICE 22 1. Increase in the Rate of Interest 25 2. Increase in Principal Repayments 26 PART II: GROWTH IN INCOME AND SAVINGS I. INTRODUCTION 29 II. SAVINGS AND fUWSFER ASPECTS OF DEBT SERVICE 29 III. GROWTH IN REAL INCOME AND GROWTH IN DEBT SERVICE 30 1. Growth in World Income 30 2. Ratio of Debt Service to Total Income 32 IV. GROWTH IN PER CAPITA INCOME 37 V. DEBT SERVICE ANTD SAVINGS 42 1. Ratio of Debt Servige to Savings 42 2. Rates of Savings 46 (a) Current Level of Savings 49 (b) Postwar Changes in Savings Rates 50 Table of Contents (continued) Page PART III: GROWTH IN EXTERNAL RECEIPTS A1N BALANCE OF PA'IVIMTS FLEXIBILITY I. INIRODUCIION 54 II. GROWTH IN WDRLD TRADE AIM PAMI;ENTS 1. Value and Volume of World Trade 54 2. Supply of Creditor Countriest Currencies 56 3. Ratio of Investment Income Earnings to Creditor Countries' External Payments 59 III. RATIO OF DEBT SERVICE TO EXTERNAL EARININTGS OF DEBTOR COUNTRIES 1. Postwar Changes in the Ratio 63 2. Present Level of tlhe Ratio 68 3. Comparison Between Present Ratios and Ratios in the Past Periods of Foreign Lending 72 4. The Significance of Debt Service Ratios 76 IV. GROWITH AND SIRUCTURAL CHA1'IGES IN EXPORTS 1. Importance of Growth of Ecports 79 2. Growth in the "Real" Value of Excternal Earnings in the Postwar Period 80 3. Growth in Volume of Exports 83 4. Changes in the Structure of Exports 89 V. BALANCE OF PAMZEqTS FLEXIBILITY AM TIlE PROBLELVI OF ADJUSIMRIT 1. Types of Required Adjustment 95 2. The Problem of Lcng-run Adjustment (a) Postwar Growth in Imports 96 (b) Pattern of Import Growth 99 (c) The Process of Adjustment 101 3. The Effect of Short-term Disturbances (a) The Postwar Experience 103 (b) Methods of Adjustment 106 (i) Use of Monetary Reserves 106 (ii) Selective Curtailment of Imports 109 CONCLUSION 112 - iii - LIST OF TABLES PART I Page Table I Public External Debt of 52 Countries as of December 31, 1955 13 Table II Regional Distribution of Gross Borrowing of 36 Countries (Group "A"), 1946-1955 15 Table III Gross Borrowing, Principal Repayments and Net Capital Repayments and Net Capital Inflow of Major Debtors, 1946-1955 17 Table IV Decrease in External Public Indebtedness, 19h5-1955 21- Table V Regional Distribution of Debt Service Payments for 50 Countries in 1955 23 Table VI Effective Interest Rates by Regions, in the Post-war Decade 25 Table VII Growth in Components of Debt Service Payments, 1946-1955 26 Table VIII Gross Borrowing, Principal Repayments and Net Capital Inflow on Public Account in 24 non- European Countries, 1949-1955 28 PART II Table I Distribution of Group "A" Countries According to Rates of Growth in Real Deot Service and Real Income in the Postwzar period 32 Table TT Ratio of Debt Service to Gross Income 34 Table III Postwar Rates of Growth in Real Income 38 Table IV Rates of Growth in Inccme and Output 41 Table V Proportion of Gross Savings Absorbed by Debt Service 43 Table VI Postwar Gross Savings Rates 47 Table VII Changes in Gross Rates of Remaining Savings in the Postwar Period 51 PART III Table I Value and Volume of World.Exports, 1913-1929 and 1937-1956 55 Table II Postwar Growth in Commodity Imports of Creditor Countries 57 Table III Investment Income Receipts of Main Creditor Countries as Proportion of their Aggregate External Payments, 1946-1955 59 Table IV Investment Inccme Receipts of I-ain Creditor Countries as Proportion of their External Payments, 19201s, 1930's and 1950's 61 - iv - List of Tables (continued) Page Table V Changes in the Ratio of Public Debt Service to Current Account Receipts, 1946-1955 65 Table VI Proportion of Current Account Receipts Absorbed by Debt Service 69 Table VII Ratios of Investment Inc me Payments (Public and Private) to Current Account Receipts of Major Debtor Countries in the 1900[s', 1920 s and 1950ts 73 Table VIII Ratios of Public Debt Service to Exports in Eight Latin American Countries in the 1920 s', 1930's and 1950's 75 Table 'IX Postwar Increase in the "Real" Value of Current Account Receipts Remaining after Service Payments 81 Table X Rates of Growth in Export Volume 84 Table XI Changes in the Export Structure of Selected Debtor Countries 90 Table XII Postwar Annual Growth Rates in Imports and their Relationship to Income and Export Growth 96 Table XIII Share of Capital Goods in Total Imports 99 Table XIV Postwar Short-term Declines in Current Account Receipts 104 Table XV Ratio of Official Gold and Foreiga Exchange Reserves to Total Imports (c.i.f.) 206 - v - LIST OF APPENDICES PART I Page Appendix I Coniments on Table I .. .. .. .. 115 Appendix II Growth in Debt Outstanding by Regions, 1945-1960, (Group "A") .. .. .. 16 Appendix III Public Debt Outstanding by Countries, (Group "A"), 1945, 1950 and 1955 .. .. .. .. 117 Appendix IV Debt Service Payments in 1955, (50 Countries, Group "A" and "B"). .. .. g.. 118 Appendix V Growth in Debt Service by Regions, 1946-6D, (Group "IA"t) .. .. .. .. 120 Appendix VI Debt Service Payments, 1946, 1950, and Projected Annual Average for 1956-6), (Group "A" and "B" Countries). .0 .. .. .. 122 Appendix VII Effective Rates of Interest., (1946-59), Average Effective Periods of Repayment (1946-55) and Proportion of Present Debt Scheduled to be Repaid in 1955-60, (Group "A" and "B" Countries). .. 125 PART II Appendix I Sources and Methods for Table I .. .. .. .. 127 Appendix II Sources and Methods for Tables II, III, IV, V, and VI .. .. .. .. 128 Appendix III Postw^^ar Growth in Agricultural and Industrial Production .. .. .. .. 136 PART III Appendix I Sources and Methods for Tables III and IV .. .. .. 137 Appendix II The Calculation of the Public Debt Service Ratio .. 138 Appendix III Sources arnd Methods for Table IX .. .. .. .. 139 Appendix IV Sources and YMethods for Table XI .* so go 144 Appendix V Sources and Methods for Tables XII and XIII . .. .. 153 Appendix VI The Share of Capital Goods and Cansmer Manufaebures in Total Imports *. ..* 156 FOREWORD It is well known that the postwar decade has witnessed a substantial increase in the foreign public indebtedness of a great number of I.B.R.D. member countries. The purpose of this paper is to obtain a comprehensive view of this increase in debt and, on the basis of selected statistical indicators, to relate growth in indebtedness and the resulting increase in service payments to the rise in the economic potential of borroling countries, which has taken place during the last decade, The paper is divided into three parts. The first part describes the postwar growth and present level of outstanding public debt and of public debt service payments. The second part reviews the postwar changes in income and savings in relation to growth in service payments. The third part analyses the external aspect of debtor countries? economic growth and discusses the problem of the transfer of debt service. The analysis covers primarily public external debt!/ and public debt service payments. However, wherever possible, service payments on private account are also discussed in order to throw some light on the magnitude of the total financial charge on the debtor countries' economies. The findings embodied in this paper lead to some general conclusions regarding the postwar relationship between growth in debt and growth in economic potential. However, they should not be construed to indicate the future debt-servicing capacity of particular countries and, by the same token, they should not be interpreted to provide a conclusive measurement of the relative international position of particular countries with respect to their future debt servicing capacity. The paper deals only with the past experience; future debt servicing capacity primarily depends on economic prospects which may differ from past experience. Also, the paper is limited to an examination of a selected set of statistical indicators, which do not include all the elements which actually influence the flow of service payments, such as, for example, domestic public finance considera- tions. No attempt has been made to directly analyse debtor countries' past financial policies or to forecast future policies; in practice, of course, these policies often exert a determining influence on the fulfill- ment of external financial obligations. For practical reasons the period covered by the analysis is the postwar decade which ends with the year 1955. Consequently, except in a few instances, the paper does not take into account changes which may have occurred since 1955p either in outstanding indebtedness or in the economic trends in borrowing countries. 21 For a precise definition see page 12.