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

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Author Info
Basu, Kaushik (Cornell U)
Morita, Hodaka (U of New South Wales)

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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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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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Find related papers by JEL classification:
F30 - International Economics - - International Finance - - - General
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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  1. 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. [Downloadable!] (restricted)
  2. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-1), pages 1-118. [Downloadable!]
  3. 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. [Downloadable!] (restricted)
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  4. Craig Burnside & David Dollar, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. 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,.
  7. Jeffrey A. Frankel & David Romer, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June. [Downloadable!] (restricted)
  8. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April. [Downloadable!] (restricted)
  9. 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. [Downloadable!] (restricted)
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