The paper studies a two-region economy that has two sectors and three factors of production: oil, capital, and labor. The South exports oil in exchange for industrial goods from the North. There is a net capital inflow to the South. This equals the difference between its export revenues and import costs, and represents the South's indebtedness. This overseas borrowing finances the development of the oil sector: increased borrowing leads to &her oil supplies, to new levels of consumption and a new distribution of income in the South, and to new levels of industrial exports from the North. The paper studies the macro impacts of changes in the values of the debt on both the borrowing and the lending regions
