Following the “structural approach”, deeper structural characteristics of a
country are related to the probability of a debt rescheduling. Berg and Sachs
(1988) develop a cross-section probit model of debt rescheduling, occurred between
1982-’87 to 35 developing countries, which links the occurrence of this event to
key structural characteristics of developing countries (like the trade regime, the
degree of income inequality, the share of agri culture in GDP and the level of
per capita GDP). They argue that outward orientation of trade policy should
enhance the growth prospects of developing countries, as well as their capacity
to adjust to external shocks, while a high degree of income inequality would
increasethe political pressurefor excessive foreign borrowing.9 Ontheother hand,
governments which ...nd their political support mostly in the agricultural sector
would be politically more stable and, by extension, less subject to external debt
crisis. Finally higher income countries may be less likely to reschedule their debt
than poorer countries, since the cost of a rescheduling would tend to be higher
for more advanced economies. In their model, the degree of income inequality,
the share of agriculture in GDP and the level of per capita GDP are signi.cant
variables (with a positive and two negative coe^ients, respectively).
Finally, Lee (1991) tests a model whose explanatory variables were obtained
from a “willingness to pay” model. That is, in his scenario, at each payment, the
borrower compares the expected value of his discounted utility of consumption
with repayment, against the expected value of his discounted utility of consump-
tion with either default or rescheduling.10 In his model the probability of default
depends positively on the interest rate on international lending, total foreign debt
(respect to GNP) and the ratio of government debt held domestically to GDP.
Negativelyon the growth rate of per capita GDP, the growth rate of industrialised
countries and the variability of changes in per capita GDP.
9The pressure for income redistribution is likely to be greater in economies characterised by
higher income inequalities, in which a govern ment could satisfy the internal demand for higher
public expenditure through foreign borrowing, without either rising taxes or in≠ation.
10 Solvency is not considered a rel evant issue since the borrower has the resources to honour
its debt obligation.
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