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International Credit and Welfare: Some Paradoxical Results with Implications for the Organization of International Lending

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  • Basu, Kaushik

    (Cornell U)

  • Morita, Hodaka

    (U of New South Wales)

Abstract

This paper models a developing nation that faces a foreign exchange shortage and hence its demand for foreign goods is limited both by its income and its foreign exchange balance. Availability of international credit relaxes the second constraint. It is shown that in this setting the availability of international credit at concessionary rates can leave the borrowing nation worse off than if it had to borrow money at higher market rates. This ‘paradox of benevolence’ is then used to motivate a discussion of policies pertaining to international lending and the Southern government’s method of rationing out foreign exchange to the importers.

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Bibliographic Info

Paper provided by Cornell University, Center for Analytic Economics in its series Working Papers with number 01-05.

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Date of creation: Mar 2001
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Handle: RePEc:ecl:corcae:01-05

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  1. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier.
  2. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  3. Anant, T. C. A. & Basu, Kaushik & Mukherji, Badal, 1995. "A model of monopoly with strategic government intervention," Journal of Public Economics, Elsevier, vol. 57(1), pages 25-43, May.
  4. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  5. Ashwini Deshpande, 1999. "Loan Pushing and Triadic Relations," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 914-926, April.
  6. Raquel Fernandez & Jacob Glazer, 1989. "The Scope for Collusive Behavior Among Debtor Countries," NBER Working Papers 2980, National Bureau of Economic Research, Inc.
  7. Basu, K., 1991. "The International Debt Problem, Credit Rationing, and Loan Pushing: Theory and Experience," Princeton Studies in International Economics 70, International Economics Section, Departement of Economics Princeton University,.
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