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A Stability and Social Investment Facility for High Debt Countries

Author

Listed:
  • Nancy Birdsall
Abstract
A number of high-debt emerging-market economies face structural, long-term debt problems that tend to keep their growth rates low, that impart an unequalizing bias to the growth process, that severely constrain social spending and human development, and that make them vulnerable to capital flow reversals. Unless the nature and pace of growth can be improved in these lower-middle income countries, the Millennium Development Goals (MDGs) are unlikely to be met either in many of these countries, or globally. These high-debt emerging-market economies face an impossible choice between draconian and never-ending fiscal austerity, or crisis and a “debt event.” Both “bitter pills" impose high social and economic costs. This paper proposes the creation of a “Stability and Social Investment Facility” (SSF) to be housed either at the IMF or the World Bank. It would be a long-term facility to help high-debt emerging market countries cope with and ultimately overcome what will otherwise remain a chronic structural weakness. The SSF would be an instrument providing a steady and predictable source of long-term funds as well as a strong policy signal to help high-debt emerging-market economies reduce their debt burden without having to forgo vital pro-poor social expenditures and growth programs. For the facility to have a significant impact on debt and income dynamics in the eligible countries, we estimate it would need to lend $10-20 billion a year. The financial cost to the donor community would be the interest subsidy built into the SSF; were the subsidy 200 basis points, the cost in the first year would be $20 million for every $1 billion of lending. The rationale for the subsidy element is its catalytic role in facilitating a strong commitment to both prudent macroeconomic policies and pro-poor growth policies. The lower interest cost of the SSF, even if modest, would make it financially and politically easier for governments in eligible countries to address their long-term social (MDG) objectives, while maintaining a sound fiscal stance.

Suggested Citation

  • Nancy Birdsall, 2006. "A Stability and Social Investment Facility for High Debt Countries," Working Papers 77, Center for Global Development.
    • Handle: RePEc:cgd:wpaper:77
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    File URL: http://www.cgdev.org/content/publications/detail/5853
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    References listed on IDEAS

    as
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    Cited by:

    1. Ronald U. Mendoza, 2007. "A Compendium of Policy Instruments to Enhance Financial Stability and Debt Management in Emerging Market Economies," Working Papers 48, United Nations, Department of Economics and Social Affairs.
    2. Eduardo Wiesner, 2008. "The Political Economy of Macroeconomic Policy Reform in Latin America," Books, Edward Elgar Publishing, number 12913.
    3. Leisa Perch & Rathin Roy, 2010. "Social Policy in the Post-crisis Context of Small Island Developing States: a Synthesis," Working Papers 67, International Policy Centre for Inclusive Growth.

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    More about this item

    Keywords

    emerging market; high-debt; structural debt;
    All these keywords.

    JEL classification:

    • F0 - International Economics - - General
    • O0 - Economic Development, Innovation, Technological Change, and Growth - - General

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