THE DYNAMICS OF INDEBTEDNESS IN THE DEVELOPING COUNTRIES:
THE CASE OF THE PHILIPPINES
Phares P. Parayno and Khalid Saeed
East-West Center
Honolulu, Hawaii
ABSTRACT
The relationships between foreign capital inflows, the build-up of debt, and economic growth in a
developing country are analyzed using a system dynamics model of the pertinent processes. The
Philippines serves as an empirical case to apply the model. The model incorporates the macro-structure
of economic growth, the micro-structure of market-clearing mechanisms, and an accounting of the money
flows. The study shows that economic policies enhancing debt-servicing ability create better economic
performance than those limiting loan giving. Increasing capital-intensity is the most important part of such
policies. They are further facilitated by encouraging investment through decreasing taxes and enhancing
demand through increasing government spending and promoting exports. Thus, augmentation of domestic
resources by foreign capital inflows appears to be a viable economic strategy.
Keywords: Economic development, foreign debt, national planning, public policy, system dynamics,
feedback, modeling, simulation
INTRODUCTION
Guided by the economic models suggesting that growth rate can be stepped-up by increasing resources
for investments, the developing country governments have often resorted to foreign capital borrowing to
supplement domestic resources in their efforts to fuel industrialization. The borrowed capital is also often
used to finance capital imports necessary to expand the export industries and for capital outlays for
upgrading the infrastructure. As further economic expansion is targeted, more capital imports are needed.
As a consequence, foreign debt increases, which creates heavy debt service burden. When debt service
payments begin to take a greater share of GNP, operating expenses and capital outlays for development
purposes are reduced, which curtails growth. A remedy increasingly being suggested to decrease foreign
debt is to reduce growth targets by decreasing the expenditure on industrial and infrastructural expansion
(Feder 1978; Lal and van Wijnbergen 1985). However, many highly-indebted Latin American and Asian
developing countries which adopted this policy, continue to endure high debt service payments while
attaining either a minimal or no economic growth (Dietz 1986; Orlando and Teitel 1986). It is, therefore,
imperative to search for alternative policies which might be more effective.
This paper examines the relationships between economic growth and foreign capital inflows in an effort
to understand the causes of the build-up of extemal debt coupled with stagnation in economic
performance. The case of the Philippines is used as an illustrative example. An attempt is also made to
search for appropriate policies for increasing growth without creating a heavy debt burden. The analysis
is accomplished through a system dynamics model adapted from one developed by Arif and Saeed (1989)
in a study on oil-dependent growth in Indonesia. Additional structure incorporating financial decisions
to borrow and service debt have been added to the model of Arif and Saeed and the oil sector originally
built into it has been deleted since it is irrelevant to the case of the Philippines. Technical details of this
model are reported in Parayno (1989). A complete listing of the model written in DYNAMO can be
obtained from the authors on request. Experimentation with this model suggests that economic policies
enhancing debt-servicing ability create better economic performance than those limiting loan giving. Such
policies include increasing capital intensity and stimulating demand. The economic takeoff resulting from
these policies may support high debt servicing which subsequently decreases debt levels and finally, also
the dependence on foreign capital inflows.
Page 416
System Dynamics '91 Page 417
THE PHILIPPINES’ DEBT PROBLEM: AN OVERVIEW
As.a part of her industrialization strategy, the Philippines from the late 1960s began to expand her light
manufacturing industry. which exported much of its production. Thus, in the late 1960s and early 1970s,
over which the volume of world exports rose rapidly at an annual rate of 8.5%, the Philippines recorded
favorable export eamings. Exports grew by an average of 20.7% per year as contrasted to 7.1% per year
in the 1960s, with the share of non-traditional exports in the total increasing from 7.5% in 1970 to 38.0%
in 1980 (Remolona, et. al. 1986).
This growth, however, incurred high investment cost. The government built many export processing zones
in 1970s to promote exports. Hence, government capital outlays increased by 25% per year from 1974 to
1982, which was a further increase from an already high expansion rate of 21% per year over the 1960s.
Private investment rate increased by an average of 30% per year from 1974 to 1982 (Remolona, et. al.
1986; de Dios 1984).
BILLION US $
35
The increase in goverment capital outlays mon bunt avecen
for the export promotion infrastructure and = 3+ | — cest senvice
the apparent import-dependent character of _
the manufacturing of the export products led #5 0777 ERTERMAL, DENT
to a heavy dependence on foreign capital
inflows, which is seen in the increasing
percentage of capital-goods imports: from 1s}
4.5% of potential output in 1973 to 7.1% in
1975. These heavy imports and the quadmu- —'[
ple increase in prices of oil imports from
1973 to 1974 doubled import payments, [-----~
causing current account deficit to GNP ratio = 944+ 3
EXTERNAL DEBT SERVICE
to increase from 1.2% in 1974 to 5.7% and '°"? ‘978 ‘920 1908 an
5.9% respectively in 1975 and 1976 (Remol- Figure 1: Philippines external debt and external debt service
ona, et. al. 1986; de Dios 1984), burden, 1972-1988. (Source: Central Bank of the Philippines)
It is, therefore, not coincindental that foreign debt grew rapidly after 1975. From 1973 to 1982 foreign
Capital inflows in the form of long-term and medium-term loans averaged $1.5 billion per year. This
amount is twice as much as the combined long-term and medium-term debt accumulated during the
immediately preceding 10 years which stood at about $750 million. Figure 1 presents the increasing level
of debt the Philippines owed (Remolona, et. al. 1986).
The rapid increase of external debt made it difficult for the country to cover the concomitantly increasing
debt service as shown in figure 1. The government resorted to foreign capital borrowing to meet the in-
creasing amount of interest payments, more so to short-term loans when the long-term and medium-term
loans offering relatively easy terms became more difficult to obtain in the intemational financial market.
The share of short-term borrowings in the extemal debt grew to about 43% of total outstanding loans over
the period 1981-1983. With the political events of August 1983, the reduction in the confidence of foreign
banks in the government caused them to refuse to renew short-term financing. Without replenishment
from short-term borrowings, intemational reserves fell drastically from $2.54 billion at the start of 1983
to $1.43 billion at the end of September that year (Remolona et. al. 1986; de Dios 1984; Lamberte et. al.
1985).
As debt payment difficulty intensified, the government declared a 90-day moratorium on payments of
principal on its foreign-exchange liabilities and also imposed foreign exchange restrictions. The govem-
ment then began negotiations with its private creditor banks and the IMF for debt rescheduling and an
Page 418 System Dynamics '91
additional financing of $3.6 billion for 1984. == onp
The government also agreed to cut expenses ost | PER Carita GNP
as a condition of the financing and increase
taxes to augment the foreign capital inflows,
so that additional expenses could be met.
These conditions are reflected in the GNP
figures shown in figure 2. 73
Co
PER CAPITA
Whe
The GNP actually declined after the balance 55
of payments crisis in 1983. It should be
noted that it was during this period that Ff) ae ean cae WM eR el ee Mc eT ee |
imports were restricted, government expen- 1972 1976 1980 1984 1988.
ses cut, and taxes increased. The restricted constant ar 972 prices
imports cut down essential inputs to pro- Figure 2: GNP and GNP per capita, 1972-1988 at 1972 prices.
duction, creating underutilized industrial ca- (Source: National Economic Development Authority, NEDA,
pacity, which discouraged further invest- April 1989)
ment. The cut in government expenses and
increase in taxes further discouraged investment. Because of the resulting decline of income, consumption
was constrained and savings decreased, which further constrained investment. The decreasing income also
meant that less taxes would be generated. Consequently, the country became even more dependent on
foreign loans for its debt service payments.
In the first half of 1989, the government negotiated for another foreign. financing from the IMF by
agreeing to a further cut in govemment expenses and an increase in taxes in order to improve the
country’s balance of payments situation. This may create in the future substantial negative multiplier
effects especially when per capita income has already begun to decrease because of the population growth
as shown in figure 2.
A SYSTEM DYNAMICS MODEL OF ECONOMIC GROWTH AND INDEBTEDNESS
The model used in this study incorporates: 1) the debt accumulation processes; 2) the economic growth
mechanisms; and 3) the market-clearing mechanisms, the latter two sets of mechanisms being adapted
from the model of Arif and Saeed (1989). The coverage of market-clearing mechanisms is necessary to
be able to identify pressure points through which day to day decisions of the actors in the system can be
influenced.
The variables of interest in the debt accumulation processes include debt, the acquisition of foreign loans
and debt repayments. Those in the economic growth processes include government expenditure, personal
consumption, investment, taxes, exports and imports. Finally, the market-clearing mechanisms focus. on
the optimizing behavior of individuals confined in a bounded information set. The variables considered
are general price level, interest rate, wage rate and the technological mix embodied in the capital-labor
ratio.
Following are the key assumptions implicit in the model structure:
1 The need for loans is created when expenditure exceed revenue and the value of imports exceed
the sum of the value of exports and the net factor income.
2. The net factor income is considered exogenous to the system since it is often affected by
government policy and actors outside of the system.
Loans can be obtained both from domestic and foreign sources.
Interest rate on foreign loans is exogenously determined.
There is only one commodity whose rate of production depends on the potential production rate
vee
System Dynamics '91 Page 419
and the capacity utilization factor. Potential production rate is formulated as a function of capital,
workers and government infrastructure facilities (Eisner 1989). Capacity utilization factor depends
on the short-run aggregate demands and the inventory condition (Mass 1975).
6. Inventory is increased through production and imports but decreased through government and
consumer purchases, capital investment and exports.
7. Excess inventory can be exported while shortages can be met by imports. Volume of exports and
imports can be controlled through specified policy instruments one of which is related to debt.
There is no limitation outside of the country for-exports and imports.
8. Capital goods are assumed to be homogeneous.
9. Money creation is not considered in the model; hence, money-related inflationary effects are not
included.
10. Population growth rate is exogenously determined.
Information relationships in the main sectors of the model are explained below:
Debt Accumulation Processes
The accumulation of debt is embodied in the positive eg Expenses
feedback loops shown in figure 3. Debt increases through (-)
acquisition of loans and accrual of interest. As debt
increases, debt service consisting of principal payments
and interest, rises. The consequent build-up of govem- {=}
ment expenditure draws down government money bal- Sotence’ ot
ance, which creates a need for taking more loans. =
Revenues
The insidious debt growth process explained above is, I)
however, contained by several negative feedback loops few (+) Interest / Principal
striving to equate revenues and expenses. Increasing acquisition Payments
government spending decreases govemment money +
balance to a low level where it creates a pressure to limit (-)
government spending. An increase in revenues expands Debt
government money balance, which may call for cutting
down taxes that would limit revenues. Also, payment of
outstanding interest and capital amount decreases debt,
which limits the amount of subsequent payments, while
acquisition of more loans increases government money
balance which decreases the need for more loans.
Interest Rate
Figure 3: Positive feedback loop contributing to
the accumulation of debt and controlling feed-
: backs coupled with it.
These debt accumulation processes are strongly coupled
with other mechanisms in the model which can also
prevent or facilitate escalation of debt. These are now explained.
The Economic Growth Mechanisms
The economic growth mechanisms of the model are embodied in the feedback loops representing the
multiplier-accelerator principle first proposed by Samuelson (1939). As in the original system dynamic
model suggested by Arif and Saeed (1989), the multiplier is represented through a positive feedback loop
coupled with a negative feedback loop as shown in figure 4. The multiplication process is created by the
mutual dependency of consumption and output. A disturbance in demand produces a change in output
and a proportional change in consumption which feeds back to further disturb aggregate demand. The
consumption, however, is constrained by the availability of inventory as represented in the negative feed-
back loop.
Page 420 System Dynamics '91
The accelerator mechanism is represented
through four positive feedback loops as shown
in figure 5. The innermost positive feedback income. pinventory
loop represents the classical accelerator imply- mo
ing that a rise in demand creates an increase iy
in capital investment that further increases Shipments:
demand. The first adjoining feedback loop a."
shows that increased demand increases income ¥* Desired
‘ ; : fea) inventory
of the economy that increases savings. A rise jneses’ -
in savings depresses interest rates, which sl
encourages investment, thus further enhancing fi
demand. The second adjoining feedback loop a ES
establishes that production will rise as demand inavearee Goods
is increased; the increase in production caus- Consumption Availability
ing further increase in investment. The third .
adjoining feedback loop creates increase in Figure 4: The multiplier mechanism and the controlling
production in response to the depletion of in- feedback loops coupled with it. (Source: Adapted from Arif &
ventory resulting from an increased demand. Saeed, 1989)
These four feedback loops representing the
accelerator reinforce one another.
The positive feedback loops representing
‘Shipments
multiplier and accelerator are, however, cou- a
pled with several negative feedback loops SS
Copitat
which are created by the market-clearing Investments, + beseed
mechanisms. fo" aoa
apitat
Market-clearing Mechanisms <
The market-clearing processes capture the savings Inventory
basic structural mechanism representing the *'
micro-level responses of producers and con-
sumers to changes in the market conditions,
since market-clearing for both goods and
production factors is the natural micro-com-
plement to the macro-foundations that underlie
the model (Barro 1984). The market-clearing
mechanisms included in the model are interest
Tate, general price level, wage rate and techno-
logical mix indicated by the capital-labor
ratio. Figure 5: Positive feedback loops contributing to the accelera-
tor process. (Source: Adapted from Arif & Saeed, 1989)
Interest rate is a mechanism that equates
investment and saving rates which are decoupled by a pool of uninvested savings. A downward pressure
is exerted on interest rate when the level of uninvested savings is in excess of the level necessary to
support the desired investment. Interest rate is pushed up when the uninvested savings are less than the
desired level needed to support investment. It is also pushed up by a rise in the general price level.
\
4 fea) (4)
Uninvested
Cash
Rote
Indicoted © —
Production
General price level adjusts towards the desired level necessary for equating supply and demand. This
means that price is increased when inventory (representing supply) is less than the desired inventory
(representing demand), and vice versa. General price level also affects consumption and investment.
System Dynamics '91 Page 421
Wage rate clears the labor market by maintaining unemployment rate at its frictional value. It is reduced
when unemployment rises. This reduced wage rate, however, increases the demand for workers and the
resulting increase in the hiring of workers finally restores the balance between the workers and the
unemployed.
The technological mix allows the substitution of workers for capital in the production process without
compromising on production efficiency. It is assumed that the optimal capital-labor mix will rise when
the real wage rate is higher than the average value of the marginal revenue product of workers. This
adjustment mechanism, however, involves relatively long adjustment times.
The presence of multiple growth and adjustment paths in the form of positive and negative feedback loops
makes possible the existence of many economic pattems, including increasing growth at a high level of
debt on the one hand and decreasing growth at a high level of debt on the other. Korea is an example
of the former economic pattem while the Philippines and many other developing countries in South Asia
and Latin America are examples of the latter pattem (Power 1983).
Many simulation experiments were performed to understand the economic pattem experienced in the
Philippines and to prepare a policy framework for a change. These are discussed in the next section.
UNDERSTANDING THE PHILIPPINES’ DEBT SERVICE PROBLEM
Before simulation experiments are conducted with the model, initial values representing the conditions of
the Philippines in 1972 are substituted. These include exports, imports, debt, net factor income, fractional
government purchases and population growth, besides other economic variables. These initial values are
given in the Appendix. The simulation of this modified model will be called the base run. The growth-
debt pattern observed in the Philippines taken as the reference mode for further exploratory experimenta-
tion is generated by progressively introducing the different policies adopted by the Philippines to the base
Tun case.
The different policies incorporated into the model for generating the reference mode are the following:
1) increasing government spending in the early 1970s; 2) cutting taxes to encourage investments in export
promotion in 1976; 3) keeping wage to a minimum to attract foreign investments; 4) promoting exports
without, however, restricting imports; 5) rescheduling debt and limiting debt service to 20% of export
eamings; 6) decreasing government spending and increasing tax in 1984 when heavy debt burden
precipitated in 1983. The increase in world interest rates in 1978 decreasing the availability of the long-
term loans is also introduced.
The policy of increasing government spending is implemented by stepping up the initial value of spending
of 11% of average income to 22%. Tax reduction is implemented by decreasing the initial fractional gross
profit tax by 25% in 1976. The policy of establishing a minimum wage rate to attract foreign investment
is simulated by fixing in 1976 the value of wage rate instead of letting it float.
The rise in exports is introduced by increasing the share of exports in income by 30% of its initial value
of 17.7% and making foreign trade’ respond faster to excess inventory. This would, however, also expand
imports since exports selected by the government for promotion call for installing additional infrastructure
and capital investment with high import content. This effect is simulated by increasing the fraction of
income forming imports from 18.5% to 24%.
The policy of limiting debt service payments to 20% of the export eamings is simulated by formulating
extemal debt service as the minimum of the outstanding interest and principal payments and 20% of the
export value. Rescheduling is requested in the model when liquidity problems occur. The liquidity
Page 422 System Dynamics '91
problem is assumed to take place when the level of external debt is 150% of the export value and
government money balance is less than the desired government money balance (Schelzig 1989).
The government response in 1983 to the accumulation of a heavy debt burden in limiting spending and
increasing taxes is simulated by reducing the share of income forming government spending by 20% and
increasing the fractional gross profit taxes by 50%.
The reference mode simulation incorporating above policy agenda is shown in figure 6. It is observed
that investment decreases after the policies of reducing government spending and increasing taxes are
introduced, Income also diminishes and then rises slowly. The low levels of income and investment can
Not support the increasing population, which creates rising unemployment. As population continues to
increase, income per capita declines.
Though the debt service burden is reduced in
the short run, the economy continues to be
saddled with increasing debt in the long run.
Since income does not grow as fast as the
build up of the extemal debt, it becomes very
difficult for the country to repay its debt.
Thus, debt repayment is unable to reduce the
level of external debt. To augment available
domestic resources for repaying its debt, the
country requires additional foreign capital
inflows. But unless these capital inflows
rebound the economy to a higher level of
income, the country will sink to a crisis of
high debt burden, low income and worsening
unemployment rate.
|
10%
208
B a
UNEMPLOYMENT RATE //
‘GOVERNMENT PURCHASES 208
UNEMPLOYMENT RATE,
INCOME
73000]
The simulation of figure 6 resembles in es-
sence the historical pattern described in the
earlier section of this paper. It must be recog-
nized, however, that the model used in this bE—-~~\
study incorporates only the general economic
relationships, excluding the mechanisms of “ anal ~
political change. ‘Thus, the political upheaval (972 1982 1992 2008 2012 2022 2030
of August 1983 which partly explains the ,, 2
historical pattem depicted, is outside of the Figure 6: Reference mode:
scope of the model.. If socio-political explana-
tion should be injected into the growth-debt problem of the Philippines, the model would have to be
further extended to include the socio-political relationships. This might make the model much too
complex to analyze easily. The problem of socio-political change may, however, be dealt with separately
from the problem of economic change by appropriately partitioning the system (Saeed 1988, Saeed 1990).
Our model deals only with economic change. Thus, it may not be expected to track history at every point
although it should replicate the general economic pattem, which it does.
SUSTAINING ECONOMIC GROWTH WITHOUT HEAVY DEBT SERVICE BURDEN
The preceding simulation shows that the policies of decreasing government spending, increasing taxes and
limiting debt service payments do not alleviate the debt problem which has beset many developing
countries for many years. Such policies may appear to decrease the balance of payments, since expenses
EXTERNAL DEBT SERVICE 208
WAGE RATE
som
50)
°
0
n
System Dynamics '91 Page 423
and debt service payments are reduced, they would also limit economic expansion because investments
are discouraged. Thus, a reduction in the balance of payments may give only short-term benefits since
the structural tendency to slow-growth is still present. To reduce a continually ‘increasing extemal debt
is almost impossible in a stagnant economy. In our search for an appropriate strategy, we keep in view
the economic pattern in which the high level of debt of a country will finally be repaid by an economic
takeoff that may be achieved through high investment.
In their simulation experiments searching for an appropriate growth strategy for Indonesia, Arif and Saeed
(1989) suggested government intervention to increase capital intensity so that investment is encouraged.
The specific policies accomplishing this are keeping interest rate at a low level and wage rate at a high
level. These policies were seen to apply to our case equally well and are introduced in 1989 in all the
simulation experiments that follow, searching for an appropriate growth strategy for the Philippines.
Additionally, we also experimented with several well-known altemative development and debt
management policies. These policies are: 1) increasing goverment purchases; 2) encouraging investment
through tax cuts; 3) encouraging investment through increasing savings propensity; 4) expanding exports
and restricting imports; and 5) not limiting extemal debt servicing. Each of these policies is introduced
in the model producing the reference mode in 1989.
The policy of increasing government purchases is implemented by stepping up by 10% the fraction of
income forming government purchases. The policy of encouragement of investment through tax cuts is
achieved by making a 50% reduction in the fractional gross profit tax. The policy of encouragement of
investment through increasing propensity to save is introduced by decreasing propensity to consume by
10%. Trade policies include making foreign trade respond faster to excess inventory and intensifying
exports as debt increases but limiting imports. The policy of not limiting external debt servicing is
implemented by removing the restriction of extemal debt servicing to 20% of the export eamings.
Each of the above strategies is tested for three intensities of government reactions to the changing balance
deficit - moderate, prudent and radical. It is assumed that moderate government behavior does not
normally resort to drastic tax increases when balance deficit develops as a result of the increasing
expenditure. Prudent behavior reduces government purchases as debt increases. It is represented by
adding a negative causal link from the level of debt to fractional government purchases - as the level of
debt increases, fractional government purchase decreases. Radical behavior increases taxes as government
expenses increase. It is formulated by increasing the slope of the function representing government’s
Tesponse to money balance changes in changing the tax rate. Each of these policies is introduced in the
model producing the reference mode in 1989.
The simulation results are compared in table 1 giving the relative-order magnitudes of the selected
indicators compared to the magnitudes of figure 6, in each case taken as 1. These indicators are income
per capita, unemployment rate, extemal debt to income ratio, external debt service to income ratio, capital-
labor ratio and net exports respectively in year 2030.
The comparative results of table 1 show that the growth forces are weakened by the demand-limiting
effects of decreasing government purchases as debt level increases. Income per capita for all policy runs
has relatively lower magnitude in the prudent behavior assumption than in the other two assumptions.
Debt to income and debt service to income ratios are higher. Unemployment rate is higher and capital-
labor ratio lower. As demand is limited by reduction in govemment purchases, investment is decelerated
causing a reduction in income.
The limited debt servicing capacity which is further abated by decreasing income in the prudent behavior
Page 424 System Dynamics ‘91
produces greater debt levels than in the other two assumptions. When investment lags behind population
growth, unemployment rises, which in tum makes the system move towards a higher labor intensity that
further wanes investment. This results in a worsening economic condition. On the other hand, though
the radical behavior produces slightly better results than prudent behavior, there is no definite effect on
investment. While investment is promoted by increase in government purchases it is, however,
discouraged by a tax increase.
Table 1:Performance of alternative development and debt policies under
different government behaviors.
Nature of Intervention
Base Run
4. Expanding exports | Income per capita 1.28 0.89 1.24
and restricting im-
The simulation results using the policies of increasing government purchases, cutting taxes and promoting
exports but restricting imports with the moderate behavior assumption show the most favorable
performance of the system. The simulation incorporating a high propensity to save limits demand which
weakens the growth engine and thus decreases income. The simulation which does not restrict debt
service payments to a percentage of export earnings shows a large decrease in the level of debt. These
simulation results point toward the premise that to achieve an economic takeoff without the increasing debt
System Dynamics '91 Page 425
burden, the engine of growth should be strengthened by increasing demand while maintaining a high rate
of debt repayment as income rises.
Figure 7 shows the result of combining the policies of increasing government purchases, encouraging
investment through tax cuts, increasing exports, restricting imports and not limiting debt servicing under
the moderate behavior assumptions. A sustained increase of income and income per capita is seen but
this is achieved by acquiring more loans.
External debt, therefore, is high; yet, because
of the faster rate of growth of income, exter-
nal debt to income ratio remains low. Invest-
ment rate is high because of favorable low tax
Tate; unemployment rate, therefore, is main-
tained at low values. Extemal debt service to
income ratio is also maintained at a low value.
This set of policies appears to be the best for
realizing a sustainable growth and tolerable
600m
208
208
10%
INCOME PER CAPITA
INVESTMENT
UNEMPLOYMENT RATE,
debt levels. ie os
CONCLUSION
This study suggests that policies which are
intuitively thought to reduce debt levels A giela ‘yi
through a decrease in the need for foreign r H a vt he —
loans, do not eliminate the country’s debt | |g/z/g|- 4 ym
service burden. These policies, instead, limit Bee S| ibis Sd Z 7
demand through reducing target growth rates Sage PN 2 we A
in general and reducing government spending |2| : z a ext.
in particular. While they may create atempo- | 5|5(5/5| 7 “ II Semnise
rary relief through a decrease in government —— aa
spending in that deficit is decreased, the SO pare get
ae eee fin
Gane eer Gu ee i972 1982 1992 ae 2012 * 2022 2030
depressed income growth rate reduces the + Sit ic icie
country’s creditworthiness. Also the teductioni Flawe 7: Simulason n run showing the best set of policies under
in: income generates a lower level of taxes
which may further decrease the ability to pay
the debts the country owes to the foreign banks and intemational financial institutions. Debt level may
not increase fast but neither will it decrease fast. As growth rate is depressed, the country ends up still
being burdened by a high debt service.
@
o
o
450M
Limiting debt service to a proportion of the export earings does not take the country out of its heavy debt
burden. As debt repayment is reduced, debt level decreases very slowly. At the same time, with no
apparent increase in investment, income remains depressed and the country continues to be in heavy debt.
Our analysis shows that the best set of policies propelling an economic takeoff not only requires the
nomnal government influence on the market to intensify capital investment through keeping the interest
rate low and wage rate high, it also should stimulate demand and investment. As income increases, debt
servicing ability is also increased so that the level of debt decreases. The high level of income, therefore,
eliminates the burden of debt servicing.
This study, however, does not consider the inflationary effects resulting from money creation and the
Page 426 System Dynamics '91
changes in the foreign exchange rates. It also does not take into account the effects of income distribution
on consumption and investment rates. These effects, if considered, would curtail growth, although, they.
may not change the proposed policy implications of our analysis.
APPENDIX
Values of key parameters in the base run case.
Fractional gov’t purchases = 11% of GNP
Exports = 17.7% of GNP
Imports = 18.5% of GNP
Net Factor Income. : = US$ -78.65 million
Foreign Debt = US$ 2.732 billion
Pop’n Growth Rate = 2.6% per year
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