International Trade, Factor Movements, and the Environment

By Michael Rauscher | Go to book overview

8
Intertemporal Trade and the Environment: The Foreign-Debt Problem

8.1 Introduction

So far we have been occupied with the static aspects of international trade and the environment. In Chapters 4 and 5 , where the issue has been addressed in a general-equilibrium framework, it has been assumed that the value of exports equals the value of imports and that there is no trade deficit nor a trade surplus. This is not particularly realistic and it neglects the important dimension of time. In what follows, this dimension will be introduced and intertemporal aspects of foreign trade and the use of environmental resources will be addressed.

In a world where international trade does not always balance, some countries are debtors and some countries are lenders. During the 1970s and 1980s, this process of borrowing and lending has driven developing countries into what has been called the foreign-debt crisis (see Gutowski ( 1986), Lomax ( 1986), Krueger ( 1987), and Sachs ( 1989a) for surveys). Much of the debt crisis is attributed to loose conditions of lending by international organizations and private banks that faced problems of petro-dollar recycling during the 1970s and early 1980s. Many credits were used to satisfy consumption needs but not to invest into profitable projects and in some countries capital flight has played an additional role. Moreover, in some countries loaned money was invested into resource projects in the expectation of ever-increasing real resource prices. Thus, a substantial share of the credits have not been allocated to productive uses, i.e. to projects whose rate of return would have allowed the servicing and repayment of the debt. In the beginning of the 1980s, therefore, many developing countries found themselves in situations where their debt burdens had increased whereas no substantial additional investments had been undertaken in production capacity. Since the debt burden tended to exceed the ability (or in some cases the willingness) to pay, the debt crisis became apparent. On the one hand, developing countries became subject to severe balance-of-payments problems. On the other hand, the Western banking system was under threat by the possibility of default of some of the major debtor countries.

Here, we do not wish to analyse the reasons underlying the debt crisis and ways in which it could have been avoided. Rather, we start from a situation in which a developing country has inherited a substantial external debt from the

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