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Conditionality, Debt Relief, and the Developing Country Debt Crisis

  • Jeffrey Sachs
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    This paper raises several cautionary notes regarding high-conditionality lending by the International Monetary Fund and the World Bank in the context of international debt crisis. It is argued that the role for high-conditionality lending is more restricted than generally believed, because enforcement of conditionality is rather weak. Moreover, the incentives for a country to abide by conditionality terms are also likely to be reduced by a large overhang of external indebtedness. Given the limited ability to enforce conditionality agreements, modesty and realism should be a cornerstone of each program. The experience with conditionality suggests two major lessons for the design of high-conditionality lending. First, debt forgiveness rather than mere debt rescheduling may increase a debtor country's compliance with conditionality, and thereby increase the actual stream of repayments by the indebted countries. Second, given the complexity of the needed adjustments, and the difficulty of enforcing conditionality agreements, programs are most likely to be successful when macroeconomic stabilization is given priority over large-scale liberalization.

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    File URL: http://www.nber.org/papers/w2644.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2644.

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    Date of creation: Jul 1988
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    Publication status: published as With Harry Huizinga, published as "U.S. Commercial Banks and the Developing-Country Debt Crisis", BP, Vol. 18, no. 2 (1987): 555-601.
    Handle: RePEc:nbr:nberwo:2644
    Note: ITI IFM
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    2. Obstfeld, Maurice, 1986. "Rational and Self-fulfilling Balance-of-Payments Crises," American Economic Review, American Economic Association, vol. 76(1), pages 72-81, March.
    3. Corbo, Vittorio & De Melo, Jaime, 1985. "Overview and summary," World Development, Elsevier, vol. 13(8), pages 863-866, August.
    4. Jeffrey D. Sachs, 1987. "Trade and Exchange Rate Policies in Growth-Oriented Adjustment Programs," NBER Working Papers 2226, National Bureau of Economic Research, Inc.
    5. Jeffrey D. Sachs, 1985. "External Debt and Macroeconomic Performance in Latin America and East Asia," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 523-573.
    6. Jeffrey Sachs & Daniel Cohen, 1982. "LDC Borrowing with Default Risk," NBER Working Papers 0925, National Bureau of Economic Research, Inc.
    7. Balassa, Bela, 1984. "Adjustment policies in developing countries: A reassessment," World Development, Elsevier, vol. 12(9), pages 955-972, September.
    8. von Furstenberg, George M., 1985. "Adjustment with IMF lending," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 209-222, June.
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