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Foreign Debt and Economic Development:
The Case of Zaire
Jayati Ghosh


A common method of approaching the debt problems of less
developed countries (LDCs) is by means of the distinction between
illiquidity and insolvency. This has been described as ‘the most fundamental policy issue today concerning international debt’ (Cline 1984:
35) and is based on an analogy with firms with positive net worth but
temporary liquidity problems, and firms with negative net worth
implying insolvency. Most of the proposed ‘solutions’of the debt crisis
are based on the view that the essential problem is one of illiquidity;
and the recent ‘easing off’ of the crisis situation in terms of the
increased current account surpluses of some of the major debtor
countries would appear to support this view.
However, i t could be argued that this distinction itself may be
misleading in the present international context. It is implicit in the
characterization of ‘illiquidity’ that LDC debtor countries primarily
need more time to repay their debts - i.e. that longer grace periods,
rescheduling of some debt through diverse means etc. would not only
postpone the problem but actually contribute to its resolution.
However, the crucial question is not that of time, but of a required
change in the pattern of world trade and the nature of debt servicing.
More precisely, given high levels of interest rates, the ability of debtor
countries to repay their debts requires the prolonged generation of
substantial trade surpluses by these economies. This in turn implies
the absorption of trade deficits elsewhere in the world economy,
primarily by the OECD countries.
Most econometric studies assume that the LDC export growth rate

Devefopmenr and Change (SAGE, ondon, Beverly Hills and New Delhi),Vol. 17


Jayati Ghosh

will be a multiple (of two or three times) of the growth rate of O ECD
economies. Thus, Cline (...

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