Dynamic Modelling of the Sustainable Development Finance Assessment and the SDGs

04 October 2021

The aim of this short paper is to add a dynamic model to the UNCTAD Sustainable Development Finance Assessment (SDFA) framework (Bhering, 2021), using the contribution of Vaggi and Prizzon (2013) using foreign debt as a point of departure.

Vaggi and Prizzon (2013) develop a geometry of debt sustainability (GDS) focused on the foreign debt instead of the public debt as in Pasinetti (1998)’s seminal paper on the GDS. The authors present the notion of Non-Interest Current Account (NICA) and demonstrate how domestic and foreign deficits work out. Another crucial idea is that a country is able to decrease its primary deficit by reducing expenditures as well as raising taxes and the outcome can be seen in the short run, but changing the net trade balance takes time and the evolution of the NICA is not under the control of each country. Moreover, Vaggi and Prizzon (2013) demonstrate that even in the case of total cancellation, a country that improves both GDP growth rate (g) and NICA is going to re-accumulate new debt. Therefore, although a higher rate of growth is important, the improvement of NICA is imperative to guarantee the long run sustainability of foreign borrowing for developing countries.