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International Credit and Welfare: A Paradoxical Theorem and Its Policy Implications

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  • Basu, Kaushik

    (Cornell U)

  • Morita, Hodaka

    (U of New South Wales)

Abstract

This paper considers 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. We develop a simple model of strategic interaction between lending institutions and firms, and show that 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 05-04.

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Date of creation: May 2005
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Handle: RePEc:ecl:corcae:05-04

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  1. Ashwini Deshpande, 1999. "Loan Pushing and Triadic Relations," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 914-926, April.
  2. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  3. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  4. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  5. Eaton, Jonathan, 1989. "Foreign public capital flows," Handbook of Development Economics, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 25, pages 1305-1386 Elsevier.
  6. 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.
  7. Heywood Fleisig & Catharine Hill, 1984. "The Benefits and Costs of Official Export Credit Programs," NBER Chapters, in: The Structure and Evolution of Recent U.S. Trade Policy, pages 321-358 National Bureau of Economic Research, Inc.
  8. 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,.
  9. Fernandez, Raquel & Glazer, Jacob, 1990. "The scope for collusive behavior among debtor countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 297-313, April.
  10. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  11. Ben-David, Dan, 1993. "Equalizing Exchange: Trade Liberalization and Income Convergence," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 653-79, August.
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Cited by:
  1. Basu , Kaushik & Stiglitz, Joseph E., 2013. "International lending, sovereign debt and joint liability : an economic theory model for amending the treaty of Lisbon," Policy Research Working Paper Series 6555, The World Bank.
  2. Basu, Kaushik & Varoudakis, Aristomene, 2013. "How to move the exchange rate if you must: the diverse practice of foreign exchange intervention by central banks and a proposal for doing it better," Policy Research Working Paper Series 6460, The World Bank.
  3. Antonis Adam & Thomas Moutos, 2012. "Capital Importers Pay More for their Imports," CESifo Working Paper Series 3723, CESifo Group Munich.
  4. Adam, Antonis & Moutos, Thomas, 2014. "Do capital importing countries pay higher prices for their imports of goods?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 95-108.
  5. Basu, Kaushik, 2012. "How to devalue exchange rates, without building up reserves: Strategic theory for central banking," Economics Letters, Elsevier, vol. 117(3), pages 758-761.

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