Saturday, September 01, 2007


'An effective debt strategy is part of an overall development strategy' (Fishlow). Discuss.

The Baker Plan (Structural change, increase reliance on the private sector.):
1. Tax Labor Market
2. Financial Reforms
3. Trade Liberalization
One (differs from other plans) is the greater emphasis upon fundamental, structural change in developing countries and a prescription of growth, tather than adjustment, strategy. The other is the direct involvement of the US government, rather than the IMF, in inducing greater finance.

Banks have taken their profits in the form of commissions and fees rather than in interest income. (I.E. "Securitization" and this developed into a secondary market.)
To close the financing gap requires three complementary actions. The first is an increase in official flows to restore an appropriate public-private balance in development finance that was discarded in the 1970s. The second is a reduction in the disproportion between outflows to service private sector debt and voluntary inflows. The third is a domestic development strategy that emphasizes not only export growth but also efficient import substitution as a means of conserving foreign exchange.

Baker Plan needs these three amendments:
1. They are simply not large enough.
2. narrow balance of payments approach to finance.
3. assumption that the principal source of the debt problem is the inadequate macroeconomic policies of developing countries: the balance of payments deficits were caused by excessive public sector expansion and corresponding internal expenditure.
Three types of policy lessons:
1. appropriate size of the debt
2. to its management
3. the need for development strategies that better integrate financial openness.

2. to reduce the uncertainty inherent in exchange rate variability, borrowing in different currencies should correspond more closely ot the flows of foreign exchange earnings.
3. maturity mismatches should be reduced as much as possible
4. interest rates for bank borrowing should be specified in terms of the bank cost of resources (LIBOR?).
5. more information exchange among debtor countries.
6. (final) an effective debt strategy is part of an overall development strategy.

D=M-X+iD Foreign Exchange Gap
D=I-S+iD Saving Gap
D=G-T+iD Public Sector Gap
i: average interest rate
D: debt stock outstanding

Thus Fishlow is based on the three-gap model.
Even the frequently cited rule "export growth must exceed the rate of interest for countries to be able to pay" depends on the presumption that countries are unwilling to accept continuing export surpluses.

Fishlow, A. (1988) 'External Borrowing and Debt Management' Chapter 9 in R Dornbusch and F. Leslie C.H. Helmers 'The Open Economy', Oxford University Press for the World Bank, pp187-222



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