Adjustment, inflation, investment

Chapter 6 deals with the economics of over-indebtedness (the so-called ‘transfer problem’), the economic strategies that were adopted over the course of the decade and, in particular, the key dilemma that emerged circa 1985: whereas most countries had made consistent efforts to re-balance their economy, they did not regain independent access to capital markets, and neither growth nor investment recovered. The ensuing economic debate focused in particular on the theory of a ‘debt overhang’, defended by Jeffrey Sachs and Paul Krugman. This analysis proved highly influential within the IMF and in the broader international policy debate. Moreover, at the same time as economists were arguing ever more strongly in favour of write-offs, the development of a secondary market for the same loans confirmed their message: falling prices indicated ever more clearly that the banks themselves did not expect that they would be repaid in full.