Advances the concept of real debt service capacity as the capacity of an economy to honour its external debt obligations without depressing its economic growth rate, employment levels and creating other serious macroeconomic problems. Draws the following conclusions from the econometric results: (1) large abrupt increases in debt service payments may result in serious depressions of domestic economic activity in small island economies; (2) debt relief resulting in reduced debt outflows could serve to resuscitate investment and economic growth; and (3) overall, the real debt service capacity of small highly specialized open economies such as Barbados and Trinidad and Tobago is very limited.

3/7/00 M2LMGR