boon or burden the effect of private sector debt on the risk of sovereign default in developing countries i introduction the past two decades witnessed a strong increase in private foreign borrowing in emerging markets and developing countries although in 1990 the private sector accounted for a mere 16 of all external loans disbursed to developing countries this share has increased to 77 in 2006 figure 1a likewise in 2006 the private sector s non publicly guaranteed debt liabilities accounted for 44 of developing countries total external debt up from a mere 5 in 1990 figure 1b 1 a key question in light of the ongoing global financial turmoil is what the boom in private sector external indebtedness will imply for sovereign risk in developing countries in this paper we empirically investigate the record of the past three decades to throw some light on this issue on theoretical grounds there are arguments both in favor and against a stabilizing effect of private sector borrowing on sovereign risk a critical view of private sector exposure is based on the notion that large scale private borrowing creates vulnerabilities that may eventually lead to a sovereign default a sudden stop may force the public sector to assume at least part of the private debt and this may eventually cause debt service difficulties for the government following this logic both public and private external debt pose a threat to sovereign creditworthiness the opposite argument that private sector borrowing does not harm government creditworthiness can be made by invoking the idea that the private sector is exposed to greater competitive pressure which raises the incentives to use the borrowed funds productively more importantly a potentially stabilizing role of private sector borrowing can also be linked to the distributional consequences of sovereign defaults agents who are reliant on foreign credit are particularly vulnerable to the disruptions that come along with sovereign default a larger share of the private sector in total external debt a proxy of the relative size and stake of agents that would be hurt by sovereign default would thus raise the political costs of default given the competing theoretical arguments the role of the private sector for sovereign creditworthiness is an empirical question a first impression of how these magnitudes may be related is provided in figure 2 which plots the institutional investor s measure of country creditworthiness iiccr against the level of external debt relative to gni figure 2a and the share of private long term external debt in countries total long term external debt figure 2b 2 not surprisingly the correlation between debt and creditworthiness is negative 0 37 by contrast the correlation between private sector share and the iiccr is positive 0 54 3 although this picture obviously does not prove a causal relationship it suggests that relative private sector exposure and perceived creditworthiness might be positively related figure 1 omitted figure 2 omitted further evidence that private and public debt are likely to have very different effects on the risk of sovereign default is provided in table 1 the entries in this table are cross country averages of various debt related variables just before the onset of 5 yr periods in which a sovereign default did or did not take place 4 the first column of table 1 shows that initial debt relative to gni is on average much higher before a default period than before a non default period conversely column 2 indicates that the average share of the private sector in total external debt is much higher before non default periods than before default periods a first look at the data thus seems to point into the direction that a higher share of private debt in total external debt is associated with higher perceived creditworthiness as reflected by the institutional investor s country credit ratings and with a lower likelihood of sovereign default

alleviating transitory food crises in sub saharan africa international altruism and trade the donor community has responded to unexpected or transitory drops in domestic food production in many countries in sub sabaran africa an empirical framework estimates and analyzes the correlation between this food aid and domestic production both emergency food aid and commercial imports are used to offset the effects of negative output shocks in sub saharan african countries the major recipients of global emergency food aid on average every one ton drop in cereal production is offset by the delivery of 0 8 tons of cereal and dairy products from abroad over four years most food aid arrives within a year of a shock and correlation of shocks over time along with the differences between crop years and calendar years may explain the link between aid and production the economic and political considerations also determine the global response to the emergency food needs of countries in africa the international response is not contingent on the form of government or the level of political and human rights violations poorer countries and those with well established nonemergency food aid programs receive larger amounts of emergency aid when needed food aid has long helped low income countries to sustain domestic food supplies and cope with transitory food insecurity and it has also been used to accelerate agricultural development and increase food production but food aid has been heavily criticized in the past decade on several grounds first it has been charged that the international response to food crises is slow meager and inefficient a related accusation suggests that countries granting emergency food aid disciriminate on the basis of the political and economic orientation of the recipient country second food aid has been thought to discourage domestic food production thus leading to long term dependence on donors finally it has

income distribution and the contractionary effect of protection a theoretical analysis abstract in terms of a simple model we show that the removal of a tariff from a competing foreign brand is likely to expand the size of the domestic industry when income disparities exist a tariff increases the profits of the local monopolist but is capable of cutting down the size of the local industry after providing the general theoretical condition we construct an example from a class of examples where such an outcome holds in equilibrium

finance firm size and growth the authors examine whether financial development boosts the growth of small firms more than large firms and hence provides information on the mechanisms through which financial development fosters aggregate economic growth they define an industry s technological firm size as the firm size implied by industrial specific production technologies including capital intensities and scale economies using cross industry cross country data the results indicate that financial development exerts a disproportionately large effect on the growth of industries that are technologically more dependent on small firms this suggests that financial development accelerates economic growth by removing growth constraints on small firms and also implies that financial development has sectoral as well as aggregate growth ramifications

quality discrimination among income constrained consumers abstract this paper provides a complete characterization of equilibrium menus offered by a monopolist to the income constrained consumers in a vertically differentiated market even when all consumers have the same marginal willingness to pay the monopolist can profitably discriminate between them provided they have different binding budget constraints

multiple lenders and corporate distress evidence on debt restructuring multiple banking is a common characteristic of the corporate lending particularly of medium sized and large firms however if the firms are facing distress multiple lenders may have serious coordination problems as has been argued in the theoretical literature in this paper we analyse the problems of multiple banking in borrower distress empirically we rely on a unique panel data set that includes detailed credit file information on distressed lending relationships in germany in particular it includes information on bank pools a legal institution aimed at coordinating lender interests in distress we find that the existence of small pools increases the probability of workout success and that this effect reverses when pools become large we identify major determinants of pool formation in particular the number of banks the distribution of lending among banks and the severity of the distress copyright 2008 wiley blackwell

private sector share of external debt and financial stability evidence from bank loans abstract in the last two decades the private sector has contracted a substantially larger share in the total amount of foreign currency international debt private sector share of external debt especially in developing countries in this paper i empirically examine the effect of this phenomenon on bank loan prices i find that the private sector share of external debt negatively and significantly impacts the price of bank loans this result supports the hypothesis that private sector debt contributes to international financial stability to a greater degree than sovereign debt nevertheless this impact is canceled out in the presence of fixed exchange regimes that are unsuitable with respect to fundamentals in such circumstances the private sector may take advantage of capital market distortions that are maintained by official authorities and thus exposes the country to further financial instability additional results corroborate the observation that the gain in financial stability stems from more efficient use of funds and reduced monitoring costs

the size and scope of government comparative politics with rational politicians we try to demonstrate how economists may engage in research on comparative politics relating the size and composition of government spending to the political system a downsian model of electoral competition and forward looking voting indicates that majoritarian as opposed to proportional elections increase competition between parties by focusing it into some key marginal districts this leads to less public goods less rents for politicians more redistribution and larger government a model of legislative bargaining and backward looking voting indicates that presidential as opposed to parliamentary regimes increase competition between both politicians and voters this leads to less public goods less rents for politicians less redistribution and smaller government we confront these predictions with cross country data from around 1990 controlling for economic and social determinants of government spending we nd strong and robust support for the prediction that the size of government is smaller under presidential regimes and weaker support for the prediction that majoritarian elections are associated with less public goods

privatization matters bank efficiency in transition countries abstract to investigate the impact of bank privatization in transition countries we take the largest banks in six relatively advanced countries namely bulgaria the czech republic croatia hungary poland and romania income and balance sheet characteristics and efficiency measures computed from stochastic frontiers are compared across four bank ownership types our empirical results support the hypotheses that foreign owned banks are most efficient and government owned banks are least efficient in addition the importance of attracting a strategic foreign owner in the privatization process is confirmed however counter to the conjecture that foreign banks cherry pick the most profitable opportunities we find that domestic banks have a local advantage in pursuing fee for service business finally we show that both the method and the timing of privatization matter to performance specifically voucher privatization does not lead to increased efficiency and early privatized banks are more efficient than later privatized banks even though we find no evidence of a selection effect

openness country size and government size additional evidence from a large cross country panel abstract a body of influential research has suggested that there is a negative association between country size and government size and between country size and openness and these may account for the positive association between openness and government size estimation of several models from 41 year panel data for over 150 countries indicates that while pooled ols estimates support the foregoing scenario when cross country heterogeneity is taken into consideration through the fixed effects format there is little evidence of a negative association of country size with either government size or openness therefore it does not seem likely that positive association between openness and government size arises due to the mediating role of country size

does openness to trade make countries more vulnerable to sudden stops or less using gravity to establish causality openness to trade is one factor that has been identified as determining whether a country is prone to sudden stops in capital inflows several authors have offered empirical evidence that having a large tradable sector reduces the contraction necessary to adjust to a given cut off in funding such studies may however be subject to the problem that trade is endogenous we use the gravity instrument for trade openness which is constructed from geographical determinants of bilateral trade we find that openness indeed makes countries less vulnerable to crises and that the relationship is even stronger when correcting for the endogeneity of trade

government and economic growth in the less developed countries an empirical study for 1960 1980 adam smith founded modern economics with a powerful argument that free markets are the best route to prosperity and economic growth his conclusion has been studied and debated by economists ever since including nobel prize winners friedman hayek kuznets lewis myrdal and schultz whatever economists have concluded since world war ii the majority of the less developed countries seem to have opted for extensive government regulation of the private sector and for a large public sector has the large government role slowed or accelerated the growth of ldcs obviously this is an important issue this study looks at government expenditure revenue raising and regulation greater emphasis is put on expenditure because 1 the revenue raised is presumably a function of the level of expenditure and 2 there are few internationally comparable measures of regulation there are virtually no empirical studies of the general impact of government on economic growth an extensive literature search turned up only three papers gemmell analyzed the impact of nonmarket sector growth on various measures of macroeconomic performance for 27 ldcs and developed countries for 1960 and 1970 he drew no general conclusions about the relation between the size of the nonmarket sector and economic growth marsden found a negative relation between tax gdp ratios and economic growth for a cross section of 20 ldcs and developed countries for the 1970 79 period 2 i found a negative relationship between the share of government consumption expenditure in gdp and the growth of per capita gdp for a cross section of 96 ldcs and developed countries over various time periods between 1961 and 1976 3 this paper extends the approach used in my 1983 article

a comment on a model of vertical product differentiation in a duopoly model with vertical differentiation if the firms do not cover the market the lower quality firm chooses a quality level exactly 4 7 of that of the higher quality firm and chooses a price that is 2 7 of the price of the higher quality firm copyright 1992 by blackwell publishing ltd

openness country size and government abstract this paper shows that smaller countries have a larger share of public consumption in gdp and are also more open to trade these empirical observations are consistent with recent theoretical models explaining country formation and break up and may account for the observed positive empirical relationship between trade openness and government size

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

currency crises are they all the same abstract the plethora of currency crises around the world has fueled many theories on the causes of speculative attacks the first generation models focus on fiscal problems while the second generation models emphasize countercyclical policies and self fulfilling crises in the 1990s models pinpoint to financial excesses with the crisis of argentina in 2001 models of sovereign default have become popular again while the theoretical literature has emphasized variety the empirical literature has supported the one size fits all models this paper contributes to the empirical literature by assessing whether the crises of the last 30 years are of different varieties

political connections and the process of going public evidence from china abstract we examine how political connections impact the process of going public specifically we test how political connections impact the pricing of the newly offered shares the magnitude of underpricing and the fixed cost of going public based on the experience of the newly public firms from chinese security markets and using multiple measures of political connections we find robust evidence that the issuing firms with political connections reap significant preferential benefits in the process of going public to be specific we find that firms irrespective of their ownership status with greater political connections have relatively higher offering price lower underpricing and lower fixed costs during the going public process

reputation and uncertainty toward an explanation of quality problems in competitive ldc markets abstract this paper attempts to explain the puzzle of low and variable product qualities in seemingly competitive ldc markets it shows that the cost of overcoming quality moral hazard through seller reputation rises with the rate of interest the rate of seller turnover the amplitude of idiosyncratic cost fluctuations and the relative scarcity of exogenous entry costs since markets with a multiplicity of small producers are more likely to have these characteristics they are more susceptible to suffering from quality problems the model developed here in particular highlights the role of cost variations in impeding the function of reputation in markets with moral hazard and adverse selection the derived conditions for the persistence of quality problems contribute to the explanation of quality differences between similar markets in developed and less developed countries

financial intermediary development and growth volatility do intermediaries dampen or magnify shocks the authors extend the recent literature on the link between financial development and economic volatility by focusing on the channels through which the development of financial intermediaries affects economic volatility their theoretical model predicts that well developed financial intermediaries dampen the effect of real sector shocks on the volatility of growth while magnifying the effect of monetary shocks suggesting that overall financial intermediaries have no unambiguous effect on growth volatility the authors test these predictions in a panel data set covering 63 countries over the period 1960 97 using the volatility of terms of trade to proxy for real volatility and the volatility of inflation to proxy for monetary volatility they find no robust relationship between the development of financial intermediaries and growth volatility weak evidence that financial intermediaries dampen the effect of terms of trade volatility and evidence that financial intermediaries magnify the impact of inflation volatility in low and middle income countries

the mirage of exchange rate regimes for emerging market countries this paper argues that much of the debate on choosing an exchange rate regime misses the boat it begins by discussing the standard theory of choice between exchange rate regimes and then explores the weaknesses in this theory especially when it is applied to emerging market economies it then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits the conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal financial and monetary institutions in producing macroeconomic success in emerging market countries this suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable and more on these deeper institutional arrangements a focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years

public debt and financial development abstract we examine the role of public debt in financial development the literature has highlighted its supportive role through providing collateral and benchmark we contrast this safe asset view to a lazy banks view developing banking sectors that lend mainly to the public sector may develop more slowly because it could make banks profitable but inefficient results from country level and bank level regressions are more supportive of the lazy banks view but the safe asset view seems to play a role at moderate levels of public debt held by banks there is also evidence of a harmful interaction between public debt and financial repression

words deeds and outcomes a survey on the growth effects of exchange rate regimes abstract recent studies on the growth effects of exchange rate regimes offer a wide range of different sometimes contradictory results in this paper we systematically compare three prominent contributions in this field using a common data set a common specification and common estimation methods we argue that the contradictory findings can be explained by the fact that these studies use regime classifications which reflect fundamentally different aspects of exchange rate policy

capital controls and exchange rate instability in developing economies abstract a large literature on the appropriate sequencing of financial liberalization suggests that removing capital controls prematurely may contribute to currency instability this paper investigates whether legal restrictions on international capital flows are associated with greater currency stability we employ a comprehensive panel data set of 69 developing economies over the 1975 1997 period identifying 160 currency crises we control for macroeconomic political and institutional characteristics that influence the probability of a currency crisis employ alternative measures of restrictions on international payments and account for possible joint causality between the likelihood of a currency attack and the imposition of capital controls we find evidence that restrictions on capital flows do not effectively insulate economies from currency problems rather countries with less restrictive capital controls and more liberalized regimes appear to be less prone to speculative attacks