Answer to Question #268961 in Economics for Muhammad Ali

Question

How do many low- and middle-income countries get into serious foreign-debt problems, and what are the implications of debt problems for economic development? How do financial crises affect development

Answer 1

The debt arose as many developing countries borrowed heavily from private banks in developed nations to finance their growing capital needs and to pay for sharply rising crude oil bills during the 1970s.

High public debt can negatively affect capital stock accumulation and economic growth via heightened long-term interest rates, higher distortionary tax rates, inflation, and a general constraint on countercyclical fiscal policies, which may lead to increased volatility and lower growth rates.