Sovereign debt, structural adjustment, and conditionality

Marcel Fafchamps A

43 citations0/0 files storedJournal of Development Economics

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Global Financial Crisis and Policies International Development and Aid Fiscal Policies and Political Economy

Abstract

The lack of a proper enforcement mechanism for sovereign debt generates a commitment failure. As a result, a sovereign may seek to improve its position in debt renegotiations and thus evade its debt obligations by reducing exports. Conditionality seeks to provide a solution to the incentive problem by addressing the commitment failure. Formalizing this argument, we show that conditionality helps the repayment of sovereign debt. In certain circumstances, it can eliminate debt overhang, especially when it is coupled with concessionary lending of sufficient magnitude. It is, however, unable to restore first best. When it is anticipated by lenders, conditionality may get international financial institutions and sovereign debtors into a trap where the debt overhang persist, debt rescheduling takes place periodically, and conditionality continues indefinitely.

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References

1981Debt with Potential Repudiation: Theoretical and Empirical Analysis 1995The East Asian Miracle: Economic Growth and Public Policy. A World Bank Policy Research Report. London: Oxford University Press, 1993. xvii, 289 pp.1994The East Asian miracle: economic growth and public policy 1988Financing vs. forgiving a debt overhang 1988Sovereign Debt: Is To Forgive To Forget?1986A Constant Recontracting Model of Sovereign Debt 1986The pure theory of country risk 1985Sovereign Debt as a Contingent Claim: Excusable Default, Repudiation, and Reputation

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