Domestic Reasons: A country's policies potentially affect a country's vulnerability to debt service problems, particularly if the external economic environment becomes unfavorable. According to Cuddington (1989, pp32), the policies implemented would include borrowing strategy, exchange rate management, trade orientation and aggregate demand policies. This essay would explain two key policies. Foreign Borrowing Policy When considering foreign borrowing policy, two questions need to be addressed: Have developed countries borrowed too much, and have the borrowed funds been used efficiently? 1) Have developed countries borrowed too much? Statistical evidence has shown that in the year 1983, 315 billion dollars had been borrowed from Latin America, or 50% of its GDP. So obviously the amount borrowed exceeds your repayment capacity. 2) Were the borrowed funds used efficiently? Apparently, the funds were intended to help finance manufacturing development projects, such as factories and production lines. Some funds have been earmarked for this purpose, as in the case of Brazil, which achieved significant progress in its industrial infrastructure during the 1970s. But in most cases the loans financed less reputable businesses. Latin America's borrowing was wasteful or unjustified as it primarily financed projects such as high-level consumption by elites, public deficits, and capital flight. Between 1976 and 1981, the total amount borrowed, estimated by all Latin countries, amounted to $272.9 billion, of which 91.6% was allocated to capital flight, debt servicing and the accumulation of dollar reserves. Only 8.4% was used for internal investments and a large part of this was wasted. In Africa, the size of the loans was only a small fraction of that… half the paper… they were unsuccessful. Inefficient industrialization emerged due to the insufficiency of the domestic market to support the production of many manufactured products. The limited market size of Latin American countries has limited the effectiveness of ISI. Furthermore, due to the local government's protectionism towards local industries, many sectors may produce inefficiently and command higher prices than foreign suppliers. Another reason for the rising costs was that the ISI process had become heavily dependent on imported foreign capital and expensive manufacturing technologies. Furthermore, the ISI model also creates unemployment. Evidence shows that in the 3 decades that ISI has been established in Latin America, the rate of increase in the labor force has always been higher than the rate of employment, due to the combined effects of internal migration and the use of modern labor-saving production technologies. .