Resolving The Debt Crisis Of Low-Income Countries
Poverty Traps and the Debt Overhang
One key hypothesis of this paper is that poor countries are vulnerable
to a poverty trap, which can be caused or exacerbated by an excessive foreign
debt burden. The basic idea of a poverty trap is that nonlinearities in
saving, investment, and production can lead some low-income countries
to remain stuck at low or even falling levels of GNP per capita, despite the
forces of economic convergence that are also at play in the world economy,
such as the potential for capital inflows into capital-scarce countries
and the diffusion of technology from rich to poor countries. To illustrate
the key ideas, I introduce a very simple model in which the net saving rate
falls to zero when income drops below a minimum subsistence level.12
Suppose that individuals require a level of minimum real consumption
m to meet basic needs of personal health and hygiene, food intake, and
shelter. (Unless otherwise noted, all variables are in per capita terms.)......
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Approximate Pages: 3 (250 words per double-spaced page)
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