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Trade dependency, bargaining and external debt

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  • Aizenman, Joshua

Abstract

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 arid 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.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 31 (1991)
Issue (Month): 1-2 (August)
Pages: 101-120

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Handle: RePEc:eee:inecon:v:31:y:1991:i:1-2:p:101-120

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Web page: http://www.elsevier.com/locate/inca/505552

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  1. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-78, February.
  2. Alberto Alesina & Ignazio Angeloni & Federico Etro, 2005. "International Unions," American Economic Review, American Economic Association, vol. 95(3), pages 602-615, June.
  3. Nash, John, 1950. "The Bargaining Problem," Econometrica, Econometric Society, vol. 18(2), pages 155-162, April.
  4. Alberto Alesina & Guido Tabellini, 1988. "External Debt, Capital Flight and Political Risk," NBER Working Papers 2610, National Bureau of Economic Research, Inc.
  5. Alvin E Roth, 2008. "Axiomatic Models of Bargaining," Levine's Working Paper Archive 122247000000002376, David K. Levine.
  6. Aizenman, Joshua, 1989. "Country Risk, Incomplete Information and Taxes on International Borrowing," Economic Journal, Royal Economic Society, vol. 99(394), pages 147-61, March.
  7. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  8. Ethier, Wilfred J, 1982. "National and International Returns to Scale in the Modern Theory of International Trade," American Economic Review, American Economic Association, vol. 72(3), pages 389-405, June.
  9. R. Dornbusch, 1984. "External Debt, Budget Deficits and Disequilibrium Exchange Rates," Working papers 347, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Sebastian Edwards, 1985. "Country Risk, Foreign Borrowing and the Social Discount Rate in an Open Developing Economy," NBER Working Papers 1651, National Bureau of Economic Research, Inc.
  11. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
  12. Cole, Harold L. & English, William B., 1991. "Expropriation and direct investment," Journal of International Economics, Elsevier, vol. 30(3-4), pages 201-227, May.
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Cited by:
  1. Joshua Aizenman & Eduardo R. Borensztein, 1989. "Strategic Investment in a Debt Bargaining Framework," NBER Working Papers 3019, National Bureau of Economic Research, Inc.
  2. Fafchamps, Marcel, 1996. "Sovereign debt, structural adjustment, and conditionality," Journal of Development Economics, Elsevier, vol. 50(2), pages 313-335, August.
  3. Klimenko, Mikhail M., 2002. "Trade interdependence, the international financial institutions, and the recent evolution of sovereign-debt renegotiations," Journal of International Economics, Elsevier, vol. 58(1), pages 177-209, October.

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