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Investment Incentives: New Money, Debt Relief, and the Critical Role of Conditionality in the Debt Crisis

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  • Claessens, Stijn
  • Diwan, Ishac

Abstract

External debt depresses investment and lowers economic growth below its potential through its negative effect on liquidity and expected profitability. These effects can pull a country into a downward spiral in which both the debtor country and creditors lose. This article considers the possibilities for revising contracts between a debtor and its creditors once a debt crisis has erupted. The framework that we develop shows how various combinations of new money and cuts in debt and debt service affect a debtor country's welfare, its debt repayments, and the earnings of its creditors. The analysis distinguishes between debtor countries that are willing and able to precommit credibly to an adjustment program and those that are not. This distinction provides the basis for a discussion of conditional lending by the international financial institutions to provide incentives and sanctions that make credible a debtor's promises to invest. Copyright 1990 by Oxford University Press.

Suggested Citation

  • Claessens, Stijn & Diwan, Ishac, 1990. "Investment Incentives: New Money, Debt Relief, and the Critical Role of Conditionality in the Debt Crisis," World Bank Economic Review, World Bank Group, vol. 4(1), pages 21-41, January.
  • Handle: RePEc:oup:wbecrv:v:4:y:1990:i:1:p:21-41
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    Cited by:

    1. Giulio Federico, 2001. "IMF Conditionality," Economics Papers 2001-W19, Economics Group, Nuffield College, University of Oxford, revised 01 Sep 2001.
    2. Claessens, Stijn, 1993. "Alternative Forms of External Finance: A Survey," World Bank Research Observer, World Bank Group, vol. 8(1), pages 91-117, January.
    3. Klimenko, Mikhail M., 2002. "Trade interdependence, the international financial institutions, and the recent evolution of sovereign-debt renegotiations," Journal of International Economics, Elsevier, vol. 58(1), pages 177-209, October.
    4. 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.
    5. Gooptu, Sudarshan, 1996. "Emerging policy issues in development finance," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(Supplemen), pages 85-100.
    6. Gary Dymski, 2011. "The International Debt Crisis," Chapters,in: The Handbook of Globalisation, Second Edition, chapter 6 Edward Elgar Publishing.
    7. repec:dgr:rugcds:199906 is not listed on IDEAS
    8. Fafchamps, Marcel, 1996. "Sovereign debt, structural adjustment, and conditionality," Journal of Development Economics, Elsevier, vol. 50(2), pages 313-335, August.
    9. Beetsma, Roel & Mavromatis, Kostas, 2014. "An analysis of eurobonds," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 91-111.
    10. Gode, Constantino J., 2001. "Sovereign Debt and Uncertainty in the Mozambican Economy," WIDER Working Paper Series 130, World Institute for Development Economic Research (UNU-WIDER).
    11. Lensink, Robert & Morrissey, Oliver, 1999. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," CDS Research Reports 199906, University of Groningen, Centre for Development Studies (CDS).
    12. Stephen Easton & Duane Rockerbie, 1999. "Does IMF conditionality benefit lenders?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(2), pages 347-357, June.

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