International Trade and Finance: A North American Perspective

By Khosrow Fatemi | Go to book overview

III
EXTERNAL BORROWING

External debt, not new conceptually, has taken on new significance in recent years. During the 1970s most developing countries borrowed heavily in the international financial markets, ostensibly to pay for developed projects. By the early 1980s the issue of external debt had become serious enough to replace recycling of petrodollars as the main focus of international financial circles. By the time the Mexican government declared "temporary" default in August of 1982, the issue had become a "crisis," a level at which it has remained since. The issue of external debt is discussed in Parts Three and Four. Part Three provides a discussion of some theoretical aspects of debt borrowing, to be followed by studies of the debt issue as faced by individual countries or groups of countries.

In Chapter 4, M. Raquibuz Zaman, Abraham Mulugetta, and Sandeep Talwani test the hypothesis that the size of external borrowing is a predominant factor in determining exchange-rate fluctuations of the thirteen largest debtor nations of the world, excluding the United States. They show that factors such as current account balances, changing money supplies and interest rates, and rates of inflation, which are traditionally considered to be the determinants of exchange-rate fluctuations, are only relevant for economies that are developed and the ones that are becoming so. For other countries, such criteria do not apply.

In Chapter 5, Jean-Guy Loranger presents his study of the correlation between macrodynamic equations of the circuit of capital on the one hand, and the structural price equation, comprising exchange rate fluctuations and interest rates, on the other. The objective of the chapter is to elaborate on the relationship between the financing of external debt and the accumulation of "real" capital. He develops a two-sector model (domestic and foreign) and concludes by applying his model to the Mexican crisis of the 1980s.

Part Three concludes with Robin King and Michael Robinson's critical study of debt scheduling and their empirical evaluation of current rescheduling policies. Using the model of debt servicing problems developed by Feder, Just, and Ross, the authors attempt to statistically determine the impact of debt rescheduling on a country's ability to continue to meet debt servicing obligations. After an analysis of current rescheduling practices and the nature of a rescheduling success, results are presented indicating that rescheduling does not appear to decrease debt service difficulties, but rather increases the probability of a later crisis.

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