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International credit and welfare: A paradoxical theorem and its policy implications

  • Basu, Kaushik
  • Morita, Hodaka

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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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 50 (2006)
Issue (Month): 6 (August)
Pages: 1507-1528

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Handle: RePEc:eee:eecrev:v:50:y:2006:i:6:p:1507-1528
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  1. Hansen, Henrik & Tarp, Finn, 2000. "Aid and Growth Regressions," MPRA Paper 62288, University Library of Munich, Germany.
  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. 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.
  4. 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.
  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.
  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. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  8. 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.
  9. Ashwini Deshpande, 1999. "Loan Pushing and Triadic Relations," Southern Economic Journal, Southern Economic Association, vol. 65(4), pages 914-926, April.
  10. 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.
  11. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
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