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Trade Dependency, Bargaining and External Debt / Joshua Aizenman, National Bureau of Economic Research.
- Format:
- Book
- Author/Creator:
- Aizenman, Joshua, author.
- National Bureau of Economic Research, author.
- Series:
- Working paper series (National Bureau of Economic Research) ; number 2726.
- Working paper series (National Bureau of Economic Research) ; number 2726
- Language:
- English
- Subjects (All):
- Debts, External--Mathematical models.
- Debts, External.
- International finance.
- Investments, Foreign.
- International economic relations.
- Physical Description:
- 1 online resource (29 pages) : illustrations.
- Place of Publication:
- Cambridge, Massachusetts : National Bureau of Economic Research, 1988.
- Summary:
- This paper analyzes the factors determining the effective payment on outstanding debt in the presence of partial defaults, and the feasibility of renewed investment. We show that the bargaining outcome, which determines the repayment, is dictated by the trade dependency, as measured by the substitutability of domestic and foreign products. A higher relative size of sectors with lower substitutability between domestic and foreign products will increase the trade dependency of the nation, reducing its bargaining power and thereby increasing the resource transfer ceiling. The resultant increase in the ceiling makes the nation less risky, increasing the willingness of creditors to lend. Thus, while a strategy of outward growth has the cost of increasing trade dependency, it has the benefit of increasing the availability of external finance. Even with a partial default, investment in highly trade dependent sectors with high productivity may be warranted. This investment can be implemented by a marginal relief of the present debt service, in exchange for investment in the proper sector. Following such a scheme may require a detailed conditionality as well as careful monitoring. A way to partially overcome some of the monitoring problems is through direct investment.
- Notes:
- Description based on publisher supplied metadata and other sources.
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