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6/5/2006
A Stability and Social Investment Facility for High Debt Countries
Kemal Dervis, nancy Birdsall
January 2006
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.
