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Linking development, trade, and debt strategies in highly indebted countries

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  • Diwan, Ishac

Abstract

This paper analyzes the determinants of the choice by debtor countries of a jointly optimal trade and debt strategy after the occurrence of some negative shocks. Choosing between export promotion and import substitution is a matter of determining whether it is more profitable to increase the credit ceiling to borrow more, or to reduce the credit ceiling below inherited debt so there is less to repay. Following the introduction, section 2 of the paper sets up a simple two period trade model. Section 3 analyzes the joint optimal debt and investment strategies, while section 4 discusses extensions. Section 5 reviews the welfare concerns and section 5 provides a conclusion.

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  • Diwan, Ishac, 1988. "Linking development, trade, and debt strategies in highly indebted countries," Policy Research Working Paper Series 127, The World Bank.
    • Handle: RePEc:wbk:wbrwps:127
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    References listed on IDEAS

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    1. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435, National Bureau of Economic Research, Inc.
    2. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
    3. W. Max Corden, 1988. "Debt Relief and Adjustment Incentives," IMF Staff Papers, Palgrave Macmillan, vol. 35(4), pages 628-643, December.
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