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This paper studies the relationship between financial integration, external debt sustainability, and fiscal policy space in emerging and developing (EDE) countries. We do so by applying Pasinetti’s “geometry of debt sustainability” to EDE countries and analysing how it is shaped by exposure to global financial cycles. Through the lenses of Pasinetti’s theoretical framework, we study whether global finance opens “windows of opportunities” or creates more constraints for EDE countries in offering fiscal support for structural changes, including green structural transformations. This analysis is crucial for tackling the pressing issue of the climate crisis. We suggest EDE countries may face a “gridlock”. Global finance and pressures to keep external debt sustainable make them struggle to maintain vital public investment and enact counter-cyclical fiscal actions. Lack of fiscal space in turn exacerbates technological backwardness, which feeds back in the form of more binding external constraints and tighter “surveillance” by international creditors. We support our theoretical analysis with an econometric study over a sample of 55 countries from 1980-2018. Capital controls and external macroprudential policy emerge as fundamental policies enabling EDE countries to adeptly manoeuvre through debt challenges without falling into the pitfalls of stagnation and enduring technological underdevelopment.
Keywords: Financial globalisation, fiscal space, structural change
JEL classification: F65 O14 O23