metadata: authors: 0: author: Ozler, Sule
docna: 0: docna: Have commercial banks ignored history?
docty: Policy Research Working Paper
subtopic: Banks & Banking Reform,International Trade and Trade Rules,Inflation,Crime and Society,Armed Conflict
teratopic: Finance and Financial Sector Development
abstracts: cdata!: What incentives do countries have to
            repay loans?  Do banks credibly punish borrowers that behave
            badly - and if so, how?  Two explanations are commonly
            offered for why countries repay debts:  (a) to preserve
            their reputation as a good borrower; or (b) to avoid direct
            sanctions, such as trade sanctions or the seizure of
            overseas assets.  The author empirically investigated the
            effect of repayment problems in earlier eras on the spreads
            paid by developing country borrowers in the 1970s.  She
            found that creditor banks did take account of
            borrowers' default histories.  Defaulters paid higher
            spreads than nondefaulters, and the defaulters that reneged
            on large portions of their past debt paid higher spreads.
            She also found that countries that acquired sovereignty more
            recently were charged higher spreads than other countries.
            These findings apply during an expansionist period. During
            an earlier crisis stage, markets failed to discriminate
            between borrowers that "behaved badly" and those
            that did not.
repnme: repnme: Have commercial banks ignored history?
display_title: Have commercial banks ignored history
listing_relative_url: /research/1991/03/700035/commercial-banks-ignored-history
topicv3: Commercial Banking m1326069 1236,Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698,Criminal Justice m1326993 1014,Political Violence and War m1327310 2462
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Finance and Financial Sector Development
origu: Policy, Research & Ect Affairs
no_of_pages: 37
author_keys: 0: author_key: 321142
model_extractions: **Policy, Research, and External Affairs**

# **Debt and International Finance**

WPS 620 'I'hiis paper -- a pioduct ol the Dcht and International Finance Division. International lconomn ics Departmentt-is partnoifalargerelffort in PRE toanalyzecommercial bank lending ol developing countries and to assess the prospects lor l'uture lcnd ing. Copies **arc** availablc free **f'rom the** World Bank, 18 1 I 11 Street NW, Washington DC 20433. Please contact Sheilah King-Watson, room S8-(4(0 exteinsion 33730 (31 paoes).

What incentives do countries hiave to repay loans'? Do banks credibly punish borrowers that belhave badly -and if so. how? Two explanallions are commonlkv of'lered l'or whv countries repay debts: (I ) to preserve tlheir reputation as a goo(i borrower or (2) to avoid direct sanctions. such as trade sanctions or thc s urc of overseas assets.

Defaulters paid highcr spreads than nondelaulters, and the def.aulters that rcneged on larger portions of' thcir past debt paid (even) higher spreads.

Ozler also lound **that** countiies that acquirdl sovereignty more recently were charged higher spreads than other countries.

O/ler empirically investigated **rhc** elfect of' repayment problems in carlier cras on thc spreads paid **by** developing countr) borrowers in thc 1I970s. She found thalt creditor banks did take account ofl x)rro%crs' default histories.

These findings apply durino an expansionist period. During an earlier crisis stage. markets failed to discriminate between b orrowers thalt ''haved badly" and thosc thall (lid not.

'lie lPRL WVorking Plaper SCriCS fiIcinimintC thc linfrding of work lln(dCr **v.a\ in** thc Ranks lPoIIcy Rcsc;art.h. **:and** E \Atel'n Affair 'Coin plevx Ani ol- let x oft Ili seti **iL'** is to )t t **til** c. f ink in g **on qlit** iqk **i.** Iv\, ell if **Ilite** c t inu o s .ir I **Ic thtlln [iii x I-A,II 'ed.** 'rho findil . lntirprc i.ii Io . anI o orli,)IIIi ii O II in talllI h - }. i( **i 11i0 I',',I.''!\I.I i '.', \ "III( iI** II ink **I n po i ,\**

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Have Commercial Banks lg )red History?

by Sule Ozler*

# Table of Contents

|1.|Introduction|1|
|---|---|---|
|2.|Empirical Issues|4|
||2.1 Methodology|4<br>|
||2.2 a.<br>Economic Determinants<br>of Spreads<br>b.<br>Political Determinants<br>of Spreads|6<br>8|
|3.|Results|9|
||3.1 Sample Characteristics|9|
||3.2 Estimation Results|11|
|4.|Discussion|**14**|
|5.|-onclusions|17|
|Foot|notes|19|
|Refe|rences|22|
|Tabl|es|25|

* I thank Alberto Alesina, Barry Eichengreen, Peter H. Lindert, Maurice Obstfeld, Andreas Savvides,<sup>and especially Rudiger Dornbusch for</sup> helpful comments. I have also benefitted from comments of seminar participants at UC-Berkeley, UCLA, UC-San Diego, Stanford University, USC, the Federal Reserve Bank<sup>of New York, the World Bank's Debt and</sup> International Finance Division, and participants at the All UC Economic History Conference. Funding from the World Bank's Debt and International Finance Division, NSF grant SES 89-10253,<sup>and an NBER Ford</sup> Foundation Fellowship are gratefully<sup>acknowledged.</sup>

Sule Ozler John F. Kennedy School of Government liarvard University Cambridge, MA 02138
1

# 1. Introduct-n

Have private creditors taken into account the repayment histories of developing countries in making them new loans? Specifically, were defaulters penalized by their creditors, either in the form of exclusion **from the market,** or by **contracting worse credit terms on new loans? The** empirical findings in this paper suggest that the answer is yes: creditors took into account default histories of borrowers and **contracted worse credit** terms on new loans to defaulters.

The question considered, the relevance of default histories of borrowers, is of gteat importance to understand whether and **how banks can** credibly punish badly behaved borrowers, and, thus, why a country has any incentive to repay.I In the recent body of ever growing theoretical literature on international lending, two distinct, but not exclusive, explanations for repayment of foreign debt are given. First, the reputational approch, assumes that a debtor's primary incentive to make repayments is to preserve its reputation as a good borrower (the seminal paper is Eaton and Gersovitz (1981)2). The second approach assumes that the primary motivation for repayment is the threat of direct sanctions, such as seizure of overseas assets and trade sanctions, that lenders can impose by influencing creditor country legislators (Bulow and Rogoff (1989 a,b)3). It is argued that having a reputation to pay does not enhance the **borrowing** ability of a developing country.

The belief, that primary motivation for repavment is the threat of direct sanctions, is based on creditors' legal svstem. The legal system typically gives right to the creditor government to seize a debtor's assets in the event of a default (enforcing the right beyond the juristiction of
the creditor's go-ernment requires the c3operation of another governmen:). It is, however, difficult to justify the levels of existing debt, which<sup>has</sup> an aggregate market value of hundreds of billions of<sup>dollars despite the</sup> sizable discounts in the secondary markets, with<sup>this belief.4 The threat</sup> of seizing overseas assets will not suffice if the<sup>borrower is a net debtor</sup> and the overseas assets are small, which currently is the case<sup>for many</sup> debtors. The threat of reducing the defaulting<sup>country's gains from trade</sup> is also problematic, since the creditor countries<sup>stand to lose along with</sup> the debtor from such an impediment. Unle3ss -ceditor countries are willing to bear this cost, the banks threat to impose such sanctions<sup>may not be</sup> credible.5 Thus, it appears, that short of military<sup>interventions to</sup> enforce a debt contract, which presumably are<sup>a thing of the past, direct</sup> sanctions are not sufficient.6 The current paper's contribution is a systematic, empirical investigation of the much debated issue of 'relevance<sup>of past defaults' in</sup> credit market access. The findings are important<sup>for providing validity for</sup> reputational approach.7 In this paper we investigate 2184 bank loans made to 70 developing countries during 1968-1981. 27 of these<sup>countries had</sup> sovereign borrowing experience during the former<sup>episodes of lending. The</sup> repayment problems of these countries pertain<sup>to: 1820 through the 1930s</sup> and the post war (1955-1968) period. The primary finding of this paper is that countries with histories of default were charged<sup>higher interest rates</sup> than countries with no default history. Defulaters<sup>paid nearly 2-4 percent</sup> more to private creditors for interest servicing in<sup>the 1970s than they</sup> would had they not defaulted earlier. Second,<sup>we find that the countries</sup> that a,quired sovereignty recently, e.g. many African<sup>countries, paid higher</sup> spreads than countries that had bad repayment records.<sup>These findings are</sup>
3 robust to alternative speciica Iioons ot economic and political characteristics of the borrowers, that are errploved to control for other determinants of credit terms.

How and whether banks can credibly punish defaulting borrowers has vast welfare and policy implications, s'evond its relevance for the current academic debate. Among these implications are whether borrowers should take into account future inability to borrow in their decision to default, and whether banks should direct their resources to lobbying to influence the creditor country legal system that makes the imposition of direct penalties more effective. A main policy implication of our findings, therefore, is that boriower country governments should be concerned with future difficulties in accessing credit markets in their decision to default.<sup>8</sup> The findings in this paper are in contrast to those of other **empirical** studies that address the issue, which differ in terms of their methodologies and the period of study. In the first set of these studies, a period of stagnation in lending following a period of widespread defaults is investigated. The main finding is that borrowers that behaved "well" during the general default crisis did not have easier access to credit markets than others (Eichengreen (1987), Jorgensen and Sachs (1988), Lindert (1988)). The second set of studies analyzed the behaviour in the syndicated loan market in its expansion stage, the 1970s (Lindert and Morton (1977), and Chowdry (1988)). The conclusions is that defaulters were not penalized, in fact it appeared that thev had better credit terms than governments with "unblemished records". A discussion of why this paper reaches different conclusions and what we may learn concerning the long term behaviour in these markets when all the evidence is viewed together, is later provided in this paper.
**r** 'be emainder of tlic ri:.,>mi;',d ,i'; fo11ws Ill Section 2 the e.npirical method and th'ti **e** .:re !est **ib-d,** Sect ion 3 contains the results Sectiou, .S **a** a discussion t :he resulls and Sect ioni _5_ contains concluding remarks.

# 2. **Ezoirical Issues**

# 2.1. Methodology

The impact of a borrower's repavment history on the credit **terms it** later faces in **the** Eurocurrency r..arket is examined. In the Eurocurrency credit market the rate of interest has two components: the interbank interest rate, which represents the cost of capital to banks, and the spread above the interbank rate. The interbank interest rate is excgenous to the lending decision to specific borrowers. Hence, the determination **of** spreads will be investigated, with particular regard to the relevance of repayment histories.

The relationship between the spread, s, and the probability of default, p, can be posited (see Feder and Just (1977), Edwards (1984)) as: where 0 represents other variables, such as the discount rate that affect the spread ( For notational convenience the subscripts that would indicate country- and time-periods are not employed.). This equation is easily justified if perfect competition and risk neutral banks are assumed.<sup>1 0</sup> In implementing this model empirically, consistent with the convention, we assume that the functional form of p is logistic. l Geographic region dummv variables and time-specific dummv variables are also employed. Timespecific dumm- variables are incorporated to capture the variations of
5 spreads o-er time, **and** geo~,tl.iphic region dummy variables are incorporated to capt-re differences accross reo,ions that mav not be captured by the other '.'ariaoes in(orporated it) fa;':, spreads varied considerablv over-time in the 1<sup>97</sup> 0s (Ozler 1990).12 Incorporating a dummv variable,<sup>D, that is uni y for a country</sup><sup>**that**</sup> had any prior repayment<sup>problems and zero</sup><sup>**otherwise, the equation we**</sup> estimate (using ordinary least squares methods) is as follows: _(2)_ where x - a vector of k variables relevant to the probability, **p.** A discussion of of the<sup>variables included in this vector</sup><sup>**will be**</sup> provided in the next section,

- C = region specific dummv variable,

- T time specific dummv variable.

- 2.2. Data

Equation (2) is estimated,<sup>employing data on commercial bank loans from</sup> Eurocurrency credit markets<sup>during the 1970s.</sup> 1 Tne a contain information on the month<sup>and the year of each loan contract as well as some</sup> characteristics of the<sup>contract. We use LIBOR (London Intetoank Offer Rate)</sup> as the base rate, and<sup>include only $U.S.-denominated loans that have</sup> variable interest rates<sup>to avoid complications that may arise from</sup> comparisons across different<sup>types of financial instruments.</sup><sup>**After these**</sup> restrictions, the data<sup>set contains information on 2184 loans to 70</sup> developing countries for<sup>the 1968-81 period.</sup> The 70 countries in our<sup>sample are of three tvpes in terms of their</sup> repav..er.t histories of sov7"n -n debt The first rain division<sup>is between</sup>
6 those coutntries that were so-ereign in the former episodes of lending and .hose that became sovereign in the period followi.ig World War II, such as mans African countries. 27 of these 70 countries have been sovereign in the former episodes (1534 loans out cf 2184 in our sample) of lending **and** therefore have 'good' versus 'bad' repayment histories. Repayment histories of these countries are summarized in Table **1.** Defaults on **privately held** bonds are considered and are presented for threE episodes: 1820-1899, 19001929 and the 1930s. In order to distinguish and investigate the **effect of** more recent repayment problems, an indicator for problems with privately held bonds during the 1958-68 period, and an indicator of multilateral rescheduling agreements with official creditors during the same period are also emploved.

# 2.2.a Economic Determinants of Spreads

Two types of variables are considered as possible economic determinants of the spreads. First, some characteristics of the loan contract, second, borrower characteristics which are important in measuring the riskiness of the borrower are used.

Characteristics of the loan contract that are possible determinants of spreads are: a dummy variable that indicates whether the borrowing is public or publicly guaranteed, a dummy variable that indicates if the loan is syndicated, and maturity of the loan. A possible problem could arise from the inclusion of maturity to the extent that banks determine spread and maturity simultaneously. However, based upon practices in the Eurocurrency market and the previous literature, loan maturity is assumed to be determined prior to the spread determination (Euromoney (1970), Feder and Just (1977b), Edwards, (1984)).

To capture borrower characteristics, that are presumably important in
measuring r_e riskiness of -le borrower, we emploved variables that are similar those in previous s-.u(ties of crodit terms: total debt-to-CNP ratio, debt seryice-to-exparts ratio, imports to GNP ratio, GNP growth. lagged value of investment to GNP ratio, rate of devaluation and rate of inflation.1 In addition, the existence of IMF standby agreemenits between 1955 dnd our sample perod is considered. This variable is incorporated as a measure of economic difficulties of the recent past, and an earlier indicator of recent repayments problems, which may not be captured by the other variabl-s employed.<sup>1 5</sup> The expected signs of these indicators have been discussed extensively in the literature ( for reviews see McDonough (1982), Eaton and Taylor (1986) and Edwards (1984)), hence we will only briefly comment on this issue. Total debt to GNP ratio is expected to exibit a positive sign, since it can be considered as an indicator of solvency for a country. Liquidity problems will be measured by the ratio of debt service to exports and the sign of this coefficient is expected to be positive. Reserves to GNP ratio is an indicator of the level of International liquidity of a country, thus it is expected to have a negative sign. Ratio of investment to GNP will be negatively related to spreads, since it indicates the prospects of a countries future growth. Rat.o of imports to GNP is expected to have a negrtive coefficient as it measureF che vulnerability of the borrower to trade embargos. Alternatively positive sign would be expected to the extent that it measures the vulnerability of a country to outside shocks. Higher rate of growth is argued to result in lower probability of non-payment. High inflation is employed as an indicator of a larger probability of balance of payments crisis. Rate of devaluation is used to measure a countrv's willingness to use exchange rate adjustments to avoid balance of
payments crisis.

As an alternative empirical specification of borrowers' characteristics, we implemented a procedure similar to Ozler<sup>and Tabellini</sup> (1990). For this specification the contract level data<sup>are aggregeted to</sup> annual level (annual weighted average of spreads are calculated<sup>where the</sup> weights are the amounts of Ican contracted for each contract<sup>**within**that</sup> year). Reserves to gdp, and ratio of exports **.o**<sup>**major creditors as a share**</sup> of total exports are incorporated to measure the<sup>**vulnera.ility of a**country</sup> to non-payment penalties. Agriculture **as a** share<sup>**of gdp is used as an**</sup> indicator of economic instability that affects **a borrowers capacity to** pay. Real gdp per capita, total debt to gnp, and presence of IMF<sup>stanby</sup> agreements are also incorporated.

# 2.2.b. Political Determinants of Spreads

An important addition to the set of economic<sup>variables discussed is the</sup> introduction borrowers' political characteristics. The<sup>theoretical model</sup> considered by Ozler and Tabellini (1990) isolates<sup>the discount factor</sup><sup>**as**an</sup> important parameter in a country's level of external borrowing.<sup>Previous</sup> work by Alesina and Tabellini (1989), and Cukierman,<sup>Edwards and Tabellini</sup> (1989) showed that the size of the discount factor<sup>for</sup><sup>**a**country</sup><sup>**reflects**an</sup> important feature of the political system: namely, the degree<sup>of political</sup> instability, defined as the probability of<sup>imminent goverment change.</sup> Accordingly, it is important to incorporate such<sup>political</sup><sup>**factors as**</sup> potential determinants of the spreads so as to ensure<sup>that the results in</sup> this investigation are robust to this c-Lsideration.

The measure of political instability employed<sup>here, which is an annual</sup> estimate of probability of government change,<sup>is the same asinOzler and</sup> Tabellini (1990), and similar to that of Cukierman,<sup>Edwards and Tabellini</sup>
9 (1989). Specifically, the political instability variable is obtained from a probit model of government chang-, that uses time-series ana cross-section data over the period of 1955-82. The specifications of the probit regressions contain three broad classes of explanatory variables: economic variables designed to measure the recent economic performe ce of **the government, political variables accounting for significant political events** that may signal the imminence of a crisis, and structural variables accounting for institutional differences and country specific **factors that** do not change or change slowly over-time, such **as the nature of their** political institutions i.e. democracies, democracies in which the election date is determined by a coalition and democracies ruled by a single majoritarian par:y. In addition to the probability of regime change, variables that capture the degree of political polarization **have been** considered. These variables are political cha.lenges to the regime, violent challeni,es to the regime, unsucessfull attemps to change the government and political repre6sions.

# 3. Results

# 3.1 Sample Characteristics

In what follows the average spreads in the sample for three country groupings will be described. Overall, these averages indicate that the countries that acquired sovereignty recently, were charged higher rates than countries that were sovereign but had defaulted on their foreign debt; the sovereign countries with default record, were charged higher spreads than the sovereign countries with no default record.

Countries that were not sovereign anytime during 1820-29 or the 1930s were contracted spreads in the order of 1.28 percentage points (with a
stan(lard error of . 4d, whlile the defau'rers paid 1.22 percentage points. 'n 'lie group of coun:ries that newlv acquired soveriegnitv (43 countries), African countries (2.. countries) were charged. the highest spreads. The average spread for the African countries is 1.41 (with a standard error of 40) while **it** is 1.20 (with a standard error of .49) for the remaining countries Next, we defined a repayment record dummy variable **as in Lindert and** Morton (1987) (LD3020 in Table 2). For this purpose, we collected the countries that were not sovereign at any time during the **period of 1820** through 1930s, with the countries that were scvereign but had no repayment problems, and assigned zeros to all those countries (countries **with** "unblemished repayment records"). Countries that were sovereign and had repayment problems were assigned ones. It is interesting to observe that when countries are grouped in this way are the spreads of "good" countries (LD30 20 zero) higher than those of "bad" ones.

In contrast to above procedure, we next look at only the countries that were sovereign and compare the mean spreads of defaulters to those of nondefaulters, as they were described for various historical episodes in Table1. Table 2 indicates that defaulters paid higher spreads than nondefaulters for each definition of the dummv variable.16 (An "F" test rejects the null hypothesis that the means of the two samples are equal.) One may suspect that the above results ar. a consequence of timing of borrowing for the countires in our sample, since the entry dates of countries to the market under consideration differ and that the spreads varied over-time. However, the finding that defatilters paid higher average spreads than non-defaulters hold separatelv for each year of the sample. For everv vear in the data, the **nuil** hvpothesis that the means of the two
ii samples are equal is rejected.

# 3.2 Estimation Results

The estimation of equation (2) yields three important findings consistent with the sample averages reported above: **First, countries that** were sovereign in the former episodes of lending were contracted lower spreads in comparison to the countries that acquired sovreignty recently. Second, countries that were sovereign and defaulted were charged higher spreads than countries that were sovereign and did not default. It is important to note that more recent defaults are found to have been more important in influencing the spreads: defaults prior to 1930s did not have any impact, defaults of the 1930s, and repayment problems of the 1955-1968 period had a significant impact. Third, defaulters that reneged larger portions of their debt were charged higher spreads than ones that reneged smaller portions of their debt. Finally, these results are robust to considering borrowers' political characteristics as potential determinants of spreads. The results are presented in tables 3-7 as will be discussed below. In this discussion the focus will be on the sovereignty and repavment dummy variables (a discussion of remaining variables is contained in the previous section).

In the first columns of Table 3 and Table 4, the impact of recently acquired sovereignty is presented by considering two alternative specifications of economic variables. The dummy variable sovereign, is one for countries that were sovereign in the former episodes of lending and zero otherwise. The parameter estimate of this variable is -.13, and -.16 in the two alternative specifications and the associated 't' values are -3,8
and .2 4 respectivelv In the second column of Table 3 and Table 4, the impact of defaults in the 19Qs are Presented. The sample is restricted<sup>onlv to those countries</sup> that were sovereign borrowers in the period.<sup>The dummy variable D30 is</sup> estimated to have a positive and statisticallv<sup>significant effect on the</sup> spread (the coefficient of this dummy variable is<sup>.11, and .10 in</sup><sup>**the two**</sup> alternative specifications with respective t-values of 4.9, and<sup>2.1).</sup> In Table 5, a summary of estimated parameter and<sup>'t'</sup> **values for the** remaining dummy variables that were described in tables **1** and<sup>2 are</sup> presented. The model presented for this estimation<sup>is the</sup><sup>**one of Table**3.</sup> The results indicate first, that the effect of defaults<sup>prior to 1930s were</sup> not statisticaily significant. Second, the repayment<sup>problems in the recent</sup> history (post-war -pre 1968 period) are found to<sup>be important. Finally,</sup> even when we control for the more recent repayment<sup>problems of the post war</sup> era, dummy variables defined to incorporate information<sup>on the repayment</sup> problems of the 1930s are still found to be<sup>significant, though the</sup> parameter estimate is reduced. (This is evident<sup>from a specification which</sup> contains both OR60 and D3 0 19 dummy variables.) In order to investigate the robustness of our results we<sup>first</sup> conducted influence diagnostics suggested<sup>by Krasker Kuh and Welch (1983),</sup> so as to ensure that our results are not driven by<sup>a few influential</sup> observations. We find that the results<sup>are not a consequence of</sup> disproportionately influential results.<sup>Second, we have employed</sup> specifications in which the IMF standby agreement<sup>variable is not</sup> incorporated, 'F' tests support the specifications<sup>that incorporate standby</sup> agreement variable. As would be expected, specifications<sup>that exclude the</sup> standbv agreement variable yield a higher parameter for<sup>credit history dummy</sup>
13 va r i aib I e 'In Table 6, we present results from a specification<sup>that investigates</sup> the impact of the extent of default. These results are based on regressions that estimate the relation<sup>between the spread on bank loans and</sup> a measure of the cost of former defaults.<sup>A measure of the cost of default</sup> to the lenders could be obtained for a small<sup>set of the borrowers in our</sup> sample. Jorgensen and Sachs (1988) use<sup>long-term, nationally guaranteed bond</sup> debt issued in dollars and outstanding<sup>through the 1930s to estimate the</sup> post-default present value ratio. This<sup>ratio is defined as the ratio of</sup> repayments after default to principal outstanding<sup>at default, both</sup> discounted to 1931. The cost of default<sup>measure is available only for 4 of</sup> the countries in our sample and have a<sup>total of 158 observations.1</sup> We estimated equation (2) by replacing the repayment<sup>problem dwimmy variable</sup> with this measure of cost. The results<sup>indicate that the degree of default</sup> had an impact on the spreads charged:<sup>countries with less costly defaults</sup> paid lower spreads. The coefficient<sup>for the measure of loss is estimated as</sup> .44 with a "t" value of 3.9. The beta coefficient<sup>for this parameter,</sup> which is estimated as .56 indicates<sup>that a one standard deviation increase</sup> in the cost of default to the lenders<sup>causes the spreads to increase to 1.55</sup> percentage points from 1.29.18 In Table 7, we present results from a<sup>specification that incorporates</sup> various measures of political instabity.<sup>In the first column main</sup> characteristics of a political system<sup>are controlled for by incorporating</sup> various indicators of political polarization.<sup>The second column, instead,</sup> incorporates a measure of instability<sup>calculated as the probability of</sup> regime change. The primarv finding is<sup>that the default history indicator,</sup> D3c at this table, continues be an important<sup>and statistically significant</sup>
1 4 determinant of spreads. In both of the specifications<sup>political instability</sup> indicators are not found to be im'portant in determining<sup>the spreads.</sup> Overall, our investigation suggests that defaulters were<sup>charged higher</sup> spreads than non-defaulters. How important is the magnititude<sup>of this</sup> penaltv ? One simple approach to this question is<sup>to assume that the spread</sup> penaltv is applied each year on the servicing of the outstanding<sup>long term</sup> debt stock to financial creditors. For concreteness consider<sup>the penalty</sup> for defaults of the 1930s. Our estimations suggest that<sup>the ratio of the</sup> penaltv to interest pavments, were near 2-4<sup>percent during the 1970s.19</sup>

# 4. Discussion

The main finding of this paper is that defaulters<sup>were penalized by</sup> being charged worse credit terms than non-defaulters.<sup>In contrast, the</sup> established view appears to be that creditors<sup>have paid little attention to</sup> the debt histories of developing countries,<sup>as is evident in recent</sup> citations: "The empirical case for the pure reputation approach is also<sup>weak.</sup> Eichengreen (1987) and Lindert and Morton (1987)<sup>both show that,</sup> historically, past repayment records have<sup>had little bearing on a</sup> countrv's abilitv to borrow." (Bulow and Rogoff<sup>(1989, p 158,</sup> see also Bulow and Rogoff (1988, p.<sup>1 8</sup> ) for a **similar citation).** "..the major banks... did not discriminate between<sup>countries that</sup> had or had not defaulted in the past, or those that<sup>had or had not</sup> required rechedulings by charging the former higher<sup>premiums."</sup> Schwartz (1989, p 8-9).

The view that default historv is not important<sup>is based on two sets of</sup> studies: those that investigate a period of stagna:ion<sup>in lending</sup> following a a perird of widespread defaults,<sup>and those that investigate an</sup>
15

**-.p:i** oi :. t age in 1lnding Th- ,'osest studies to the present one are !.Lo:. of :..indert and Morton t:X-l arnd Chowdrv (1988), where the authors :. o.. ed the relation het,teen **hi.** contractual interest rates and the default. histories of borrowers in the former episodes of lending (1820 through the 1930s). The important similarity to the present paper is that both of those studies focus to a period of boom in the financial markets. A boom that was separated from the previous widespread non-payment **crisis** by a period of stagnancy in lending. Their conclusions are that **defaulters were** not penalized, in fact it appeared that they paid less than **governments** with "unblemished records". Our finding is in contrast to **theirs despite** v.erv similar methodology and same data sources. The difference, **as** demonstrated in this paper, is a consequence of **how** one **defines**

"unblemished repayment record". in their investigations, countries in the unblemished record group contain not only governments with good repayment records, but also governments that had no record because they were not sovereign in the former episodes of lending.

Our result, that creditors paid attention to repayment record of borrowers, is consistent with that of Eichengreen and Portes (1989). The atlttors, again, as in this study, investigate a period of buoyancy (the 1920s) and suggest that in pricing of foreign bonds investors discriminated borrowers according to their past repayment record The remaining studies that investigated the impact of borrowing experience on later market access has a fundamental difference from the present one. Specificallv, thev _foc_ s to a period of stagnancy in private n.I-:. g. following a widc-;prca3d o is The overall conclusion of these sr :tes iS *hat badlv a ( .l;aved hoI- rr r5 W(ere not discriminated against; th.re ...s a rereral cut:-of' of > '.r. and the borrowers that behaved
16 'well' prior to the widespread crisis, suffered from this as well. Among the best known studies, Eichengreen (1987) analvsed borrowed amounts by a cross section of 32 countries in the first post-war decade, and found no apparent relation between the severity of interwar defaults and the ability to borrow immediately after World Wir II. Jorgensen and Sachs (1988) focused on six Latin American countries and concluded that the non-defaulter country of the 1930s (Argentina) did not have easier credit access during the 1950-1964 period. Lindert (1988) investigated the spreads for 1985 and suggested that the spreads in that year were not affected by the repayment problems of the 1980s.

This evidence suggests that financial market behaviour differs during periods of stagnancy or buoyancy in terms of its tendency to discriminate among countries according to their past repayment record. During a period of buoyancy, when defaults are isolated events, the financial markets appear to focus on creditworthiness of particular countries. During a period of widespread repayment problems, however, lenders do not seem to pay attention to creditworthiness of particular borrowers.<sup>20</sup> One plausible way of interpreting these facts is to take an approach analogous to that of Sachs (1983) (a similar idea is also in Krugman (1985)). In that framework, a borrower with large outstanding debt to a large number of small creditors, though fundamentally healthy, experiences a liquidity crisis and is unable to obtain loans in a competitive equilibrium. This is because, each individual bank that has an upward sloping schedule of loan supplies to the country, which is itself a consequence of upward sloping cost of funds, develops the expectation that all other banks will stop lending to that countrv.

Aralogously, when defaults become frequent and reach a certain
17 threshold level, banks mav develop beliefs that all borrower countries will tail to make payments leading to a general cut-off of lending. From the point of view of the borrower countries, the notion that banks have developed such expectations, and, therefore, no new loans will be forthcoming will make generalized defaults more likely. This **is** because even solvent countries will find it worth while to default since they expect that in the future they will be penalized even **if they do not default.** Thus, it is rational for each bank to stop lending on the basis of these expectations. In addition, **the** latter becomes self- **confirming, and a** widespread crisis emerges. Overall, this discussion suggests that, except for a crisis situation of generalized defaults, **banks do pay attention the** borrowers reputation of good or bad behaviour.

# **5.** Conclusions

This paper investigates the impact of historical defaults on terms for bank loans in developing countries during 1968-81. The primary **finding is** that those countries that had repayment problems were charged higher spreads than countries that had good repayment record, during the 1970s. In addition, more recent defaults are found to have had a more **significant** impact: defults of the 1820-1929 period are not important in the determination of spreads, in contrast, defaults of the 1930s are found to be significant determinats of spreads, and the repayment difficulties of the 1955-68 period have had even a stronger impact on the spreads.

It is interesting that the repayment behaviour of countries **as far back** as the 1930s have mattered, even though they matter less than recent reschedulings with government creditors and the IMF stanby agreements, both of which would be considered as signs of more recent repayment difficulties.
18 _:t:t_ liN'v hi !ni!k that the nat urc (f horrower government s .^nd ident i tv of the **,-** r _w_ **_o_** _s uI_ d have c hanced _(I:_ il _h_ e surge of lending in *he 19 70s, and t hmi i: i r v **woul b(** e forgot el _c-_ II n tlOh the governments may have changed since the 13us, the different politicians may continue to be the c-xpressions of the same social groups or constituencies. As a consequence it is not unreasonable that the creditors would punish early defaulters as a deterrent. As to the creditor country institutions, it is not clear that 1<sup>9</sup> 30s decade is much of a distant history. A number of institutional changes concerning banking in the creditor governments, such **as** the **deposit** insurance system, has been developed in response to the crisis of the 1930.

A second finding of the present study is that countries that acquired sovereignty more recently paid higher spreads than countries with bad repayment records. A large number of these countries are African countries, and the result continues to hold even after a number of economic and political factors are controlled for. This may suggest a closer investigation of what recently acquired sovereignity captures. The colonial history of these countries in relation to their later access to credit markets should be considered.

Finally, this investigation contributes to the existing literature in several wavs, suggesting important areas of future work for a more complete understanding of long term behaviour in credi+ markets. First, this study raises the point that finacial market behaviour may differ during periods o:. stagnancy or buoyancy in terms of its tendency to discriminate among countries according to their past repavment record. Second, the fink..ncial market's tendencv to focus oni creditworthiness of particular countries may depend on whether defaults are isolated events or are widespread phenomena.
# FOOTNOTES

'Contract enforecement problems are ignored in some **studies which** suggest that there should be a greater integration of world capital **markets.** For a survev of the empirical evidence on **international capital mobility see** Obstfeld (1986).

See also Eaton (1989), Eaton Gersovitz **and Stiglitz (1986), English** and Cole (1987). Grossman and van Huvk (1988), Kletzer and Wright (1990), and Manuelli (1986).

3 See also Gersovitz (1983) and Kahn (1984) in **which default leads to** loss of trade. Sachs and Cohen (1985) formalize punishment as a loss to GNP, which is discussed to be a consequence of both trade **and future credit** embargos.

Bulow and Rogoff (1988) address this problem by **separating the banks** from the rest of the creditor community, where declaration of default **is not** harmfull to the banks.

> 5For a recent studv of secondary market price **determination see Ozler** and Huizinga (1990).

For details of historical military invasion to enforce **debt claims,** "gun-boat technology" see Winkler (1933), Borchard and Wynne (1951) and Dammers (1984).

-7 'Additional Empirical support for reputational approach **is in Ozler** (1990). Evidence presented in that work suggest that credit terms in the 1970s were affected by contemporenaous repayment behaviour **of the borrowers.**

8In reality, whether a government will, in fact, take such future penalties into consideration will, of course, be affected by its expectations concerning staving in power in the future.

Data on fees and commissions are not available. **Previous studies such** as Feder and Just (1977b) and Edwards (1984) also suffer from **this** inadequacy. It is noted, however, that these costs are **low relative to** spreads (see Edwards p. 728 and Cline pp. 82-83).

> 10 To illustrate this assume that loans are for one **period, and default** means complete loss of both the principal and the interest **rate. Let s** - i-i* where i* is the LIBOR rate and i is the interest **rate charged to** a countrv. Then the equilibrium condition is (l-p) (l+i) - (l+i*), **which** yields equation (1) where 9 = (l+i*). This structure has **been implemented** bv Edwards (198-5 TIntroduction of Tore realistic assumptions yield a similar str1c-,ire, foir ex..l;ple _,-c-e_ Feder and Just (1977).
_2 0_ 1, The logistic form is expressed as <!-- Start of picture text --> exp (a~0 [ + k ix )<br>]<br>P - ~~~~k<br>1+ exp (a+k x<br>12~ ~ ~~~~~-<br><!-- End of picture text --> 12A cursory inspection of the data **suggests that the cyclical pattern** of spreads over time are related to some global and macroeconomic **events** such as the oil shocks and industrialized country **growth rates. These two** variables are also correlated with the number of banks that entered the Eurocurrency market. Hence a more sophisticated approach **would require a** model that employs such variables to explain the spread behaviour **over time.**

> 1 3 Loan data for the 1973-81 period are obtained from various **issues of** the World Bank's Borrowing in International CaDital Markets. The data for the prior period, however, have been obtained through an **exhaustive search** of the financial press as well as the central bank reports of the borrower countries. For more details on this data set see Ozler (1990).

> 14 For reviews of this literature see McDonald (1982) and Eaton **and** Taylor (1986). The debt-service ratio, imports to GNP ratio, imports **to** reserves ratio, GNP growth, and investment to GNP ratios are **among** the variables that are found to have significant impact on spreads. The total debt, and debt service variables are obtained from the World Bank's World Debt Tables. The remaining vari-ables are obtained from IMF's International Financial Statistics.

15Among the 27 countries that were sovereign, the countries that did not have standby agreements during the period are Egypt, Greece, newZealand, Portugal, Taiwan and Thailand.

16 Since Lindert and Morton (1987) use the spread data for the 19761980 we have also conducted our investigation by constaining our sample period to 1976-1980. All the findings continue to hold. 1 7These countries are Bolivia, Chile, Colombia and Peru. The cost of default for thiese countries respectively are: 92%, 69%, 37*, and 61%.

18 Beta coefficients are equal to the least squares estimates multiplied by the ratio of the sample standard deviations of the independent and dependent variables, In other words, beta coefficients are in units of sample standard deviations. See Madalla (1977) pp.<sup>1 19</sup> .
19~~~~~~~~~.

s an example consit ( i ht **'y'r** 1975, the total outstanding and disbursed, public and publiclv guaranlneed medium an)d long term debt of Bolivia to its financial creditors was _211_ U.S. $ mill. The average spread Bolivia paid during 1968-1J81 was 1.90 percentage points. The parameter estimate associd,ed for defaults of the .930s is near .11. suggesting that Bolivia would have paid 1.70 percentage points on avf.rage had it not incurred this penaltv. The interest pavments on the loans considered here was 10 U.S $ mill. (spreads are form the Eurocurrency syndicated loans described in the data section of tthis piper, and all the remaining data are from the World Bank Debt Tables (1988-89 edition). Hence the **ratio** of renalty to interest payment for Bolivia was .042. **Similar calculations for** Peru and Chile in 1975 yield 017 and .024 respectively.

> 2 0Ozler(1989) demonstrates that the impact of **non-payment difficulties** on the market value of commercial banks differed when the expansion and crisis stages of the recent episode of bank lending **are compared.**
P.+ t-f%

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23

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- Consequenres," EuroRean Economic Review, 1986, 30, 599-640.

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- Institute of Governmental Affairs Working Paper No. 45, August 1987.

- Also appeared in Jeffrev Sachs (ed). Dcveloping Country Debt and Economic Performance Vol.1, NBER, University of Chicago Press, 1989.

Maddala, C.. 19', Econometrics, MYcgraw-Hill, **New** York.

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- Commercial Bank Lending to Developing Countries," **forthcoming Journal** of Development Economics.

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- UCLA Economics Dept. (manuscript in preperation).

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- Kapital, Heft 8, 1985.

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- Winkler, M., Foreign Bonds: Ann Autopsy. Philadelphia: **Swain,** 1933.
|Rt-piv<br>|ntU<br>Pro|1(lvins|Iiist|ory||
|---|---|---|---|---|---|
|Countrv||DB<br>B<br>|1q 30|OR|B<br>60|
|Argentina|I|1|0|1|0|
|Bolivia|1|0|1|0|1|
|Brazil|1|1|1|1|1|
|Chile|1|n|1|1|1|
|Colombia|1|0|1|C|1|
|Costa Rica|1|0|1|0|1|
|Ecuador|1|1|1|0|1|
|Egypt|1|0|0|0|0|
|El Salvador|1|1|1|0|1|
|Greece|1|0|1|0|1|
|Guatemala|1|1|1|0|0|
|Honduras|1|1|0|0|0|
|Liberia|1|0|C|1|0|
|Mexico|1|1|*|0|1|
|New Zealand|0|0|0|0|0|
|Nicaragua|1|1|0|0|0|
|Panama|*||1|0|0|
|Peru|1|0|1|1|1|
|Portugal|0|0|0|0|0|
|South Africa|0|0|0|0|0|
|Spain|1|0|0|0|0|
|Taiwan|1|1|1|0|0|
|Thailand|0|0|0|0|0|
|**Turkey**|**I**|**1**|*****|1|0|
|Uruguay|1|0|1|0|1|
|Venezuela|1|0|0|0|0|
|Yugoslavia|0|0|1|0|1|

**(continued)**
26 Table 1 (cont.) Notes:

-

- D19: a dummy variable. D19 1 indicates that a country has defaulted (or negotiated at concessionary terms) on its national privately held bond debt during 1900-'929.

- D20: a dummy variable defined as D19 but for the 1820-1929 period.

- D30: a dummy variable defined as D 1 but for the 1930s.

- OR: a dummy variable, OR - 1 indica-es that a country **has rescheduled** its debt to official creditors through multilateral agreements during 1956-1968.

- B60 a dummy variable where B60 - 1 indicates that a country has defaulted or continued adjusted servicing of its bond debt during the 1958-1967 period.

- ".": Panama was not sovereign during the entire 1820-1929 period, and there were no private loans to Mexico and Turkey in the 1930s.

- Sources: D 9, D20 and D30 are from Lindert and Morton (1987) OR is from Hardy (1982)

- B60 is from Foreign Bondholders Protective Council Annual Reports.
_2_ l TABLE 2

# Sample Characteristics

S.1 ::iplh Characteristics KMtans and Standard Errors of the Spreads)

|'.ariable|nI_|1|Variable|<br>0|1|
|---|---|---|---|---|---|
|D19|1 13<br>(0.44)|1.28<br>(0.49)|OR|1.12<br>(0.44)|1.39<br>(0.50|
|DI)<br>**20**|1.12<br>(0.38)|1.21<br>(0.48)|B<br>60|1.11<br>(0.45)|1.28<br>(0.48)|
|D30|1.08<br>(0.44)|1.33<br>(0.47)|**AL6 0**|**1.09**<br>(0.44)|**1.27**<br>(0.48)|
|D31<br>D3019|1.06<br>(0.43)|1.28<br>(0.50)|LD 302<br>3020|**1.25**<br>(0.49)|**1.22**<br>(0.47)|
|D3020|1.03<br>(0.42)|1.22<br>(0.47)||||

# Notes:

Spreads are the spreads on commercial bank<sup>loans</sup><sup>**from the Eurocurrency**</sup> credit markets during 1968-1981.<sup>Only U.S.$denominated loans with Libor</sup> base rate are included in the sample.

D19, D30, OR, and B60 are defined in<sup>Table 1.</sup><sup>**The remaining dummy**</sup> variabies are: D is one if D or D is one, and zero otherwise. 3019 19 30 D302 is one if DO or D30 is one, and<sup>zero otherwise.</sup> AL60 is one if OR or B 6 **is** one and **zero otherwise.** LD 3020: is zero if a country has not defaulted<sup>**anytime during 1820-1929 or**</sup> during the 1930s; in addition it is<sup>zero for countries that were</sup> not sovereign during the period. It<sup>is one otherwise.</sup>
||LAB_lE 3<br>impact ot Sovereignty|and Defaults|
|---|---|---|
|oras.tm|0. 981|0.317|
||JiS.5O5)|<br>(2.890)|
|S;ndicate|-0.006|-0.016|
||(-0.258)|<br>(-0.561)|
|Public|-0.131|-0.133|
||(-7.808)|<br>(-6.841)|
|Total Debt/GNP|0.915|**0.641**|
||(11.745)|<br>(5.204)|
|Reserves/GNP|-0.048|-0.164|
||(-3.053)|<br>(-5.670)|
|Debt Service/Export|s<br>0.004|0.003|
||<br>(1.034)|<br>(0.851)|
|IMF Standby|0.050|0.194|
||(1.977)|<br>(4.673)|
|Maturitv|0.091|0.086|
||(24.721)|<br>(18.757)|
|Investment/GNP|-1.150|-.395|
||(-8.535)|<br>(-2.083)|
|Real GNP Growth|0.040|-0.350|
||(-1.034)|<br>(-2.702)|
|Imports/GNP|-0.019|<br>-0.164|
||(-0.644)|<br>(-0.120)|
|Inflation|0.141|0.474|
||(1.629)|<br>(3.714)|
|Devaluation|-0.008|<br>-0.018|
||(-0.300)|<br>(-0.760)|
|Sovereign|-0.126||
||(-3.806)|<br>-|
|D0||0.109|
|||(4.059)|
|AdjR<sup>2</sup>|.40|.48|
|Nobs|2178|1332|

Notes: Estimated equation is (2), and<sup>the numbers in parentheses</sup><sup>**are 't' values.**</sup>
T. BL!E '+ imp.ac, **S.)vt.et-ignlty anld Dett,u; s**

|Constant|-2_087_|-2.231|
|---|---|---|
||,,-12 801)|(-11.932)|
|Reserves/'GNP|-1.823<br>|-2.438<br>|
||(-6.064)|(-5.227)|
|*<br>Export Ratio|-0.111<br>|-0.385<br>|
||(-0.762)|(-2.275)|
|Agriculture/GDP|-0.006|0.002<br>|
||(-2.090)|(0.060)|
|Real GDP/Capita|-0.001<br>(-3.431)|-0.001<br>(-3.162)|
|Total Debt/GNP|0.191|**0.098**|
||(1.220)|(0.525)|
|IMF Standby|0.099|0.192<br>|
||(1.790)|(2.604)|
|Sovereign|-0.<br>161<br>(-2.390)||
|D30|-|0.101<br>(2.112)|
|AdjR<sup>2</sup>|.53|.68|
|Nobs|292|131|

# Notes:

Estimated equation is (?) and the<sup>numbers in parenthesis are</sup><sup>**'t'**values.</sup> The data are annual.
30 TABLE 5 Impact of Alternative Repament<sup>Problems Variables</sup>

|Vart-Able|Parameter<br>_<br>_t-value)|Variable|Parameter<br>(t-value)|
|---|---|---|---|
|D19|0 009<br>(0.264)|OR6 0|0.161<br>(5.396)|
|D 20|-0.026<br>(-0.631)|B60|0.095<br>(3.446)|
|D 30<br>D30|~~0.109<br>(4.059)|AL<br>6 0|(2.788)<br>(2°788)|
|D 3019|0039327<br>03.0927R|OR60(.3<br>6|0.150<br>(5.000)|
||(1584)|D30 19|(2.275)|

Notes: Results are based on estimation<sup>of equation (2). Each specification here</sup> differs only in the definition of<sup>the repaywent dummy variable employed for</sup> variable D.

* indicates that each definition of<sup>the dummy variable has been included</sup> simultaneously in the equation.

The estimation results for the set<sup>of other variables employed in equation</sup> (2) are presented in Table 3.
,11 TABLE 6 The Impact of the Cost of former Defaults

|Constant|-2.601|
|---|---|
||(-4.729)|
|Svndicate|-0.032<br>(-0.355)|
|Public|-0.093<br>(-1.550)|
|Total Debt/GNP|0.563|
||(2.005)|
|Reserves/GNP|-0.051|
||(-0.463)|
|Debt Service/exports|-0.021|
||(0.067)|
|Maturity|0.112|
||(11.201)|
|Investment/GNP|-6.051|
||(-2.372)|
|GNP Growth|-1.272|
||(-2.312)|
|Imports/GNP|-2.533|
||(-3.725)|
|Inflation|1.42?|
||(2.410)|
|Devaluation|-0.011|
||(-0.366)|
|Cost|0.447|
||(3.912)|
|Nobs - 158<br>R<br>0.64||

# Notes:

Estimated equation is (2). where D is replaced **by** a measure of cost of default. The numbers in the parentheses are 't' values
32 TABLE 7 Impact of Defaults

|Constanit|-2.353|-2.321|
|---|---|---|
||(-11.873)|(-10.305)|
|Reserves/GNP|-2.409<br>|-2.268<br>|
||(-5.070)|(-4.071)|
|Exports Ratio|-0.413<br>|-0.514<br>|
||(-2.350)|(-1.495)|
|Agriculture/CDP|0.003<br>|**0.008**<br>|
||(0.081)|(0.150)|
|Real GDP/Capita|-0.001|-0.001<br>|
||(-3.027)|(-3.203)|
|Total Debt/GNP|0.131|**0.159**<br>|
||(0.690)|(0.660)|
|IMF Standby|0.214|0.259<br>|
||(2.788)|(1.362)|
|Political Challange|0.001<br>(0.605)|-|
|Attempts|0.010<br>(0.222)|-|
|Violent Challenge|0.001<br>(0.421)|-|
|Repressions|0.001<br>(0.495)|-|
|Instability|-|-0.167<br>|
|||(-0.147)|
|D30|0.108|0.100|
||(2.171)|(2.007)|
|Adj R<sup>2</sup>|0.68|0.68|
|Nobs|131|122|

# Notes:

Estimated equation is (2). The<sup>numbers in parentheses</sup><sup>**are 't' values.**</sup> The data are annual for the 'political'<sup>variables.</sup>
PRE Working Paper Series

|MeLl-|Author||Contact<br>ofo papel|
|---|---|---|---|
|WPS607 Abolishing Green Rates The Effects<br>on Cereals. Sugar. and O,lseeds<br>inWest Germany|Donald F Larson<br>S;mon Glance<br>Brent Borrell<br>Merlinda lngco<br>Jonathan Coleman|March 1991|D Gustalson<br>33714|
|WPS608 Cross-Country Studies of Growth<br>and Policy Methodological.<br>Conceptual and Statistical Problems|Ross**Levine**<br>David Renelt|March 1991|CECMG<br>39175|
|WPS609 A Sensitivity Analysis of Cross-<br>Country Growth Regressions|Ross Levine<br>David Renelt|March 1991|CECMG<br>391 75|
|WPS610 Can Preshipment Inspection Offset<br>Noncompetitive Pricing of Developing<br>Countries Imports? The Evidence<br>from Madagascar|Alexander J. Yeats<br>|March 1991|J. Jacobson<br>33710|
|WPS611 Tariff-based Commodity Price<br>Stabi:ization Schemes in Venezuela|Jonathan R. Coleman<br>Donald F. Larson|March 1991|S. Lipscomb<br>33718|
|WPS612 Education and Productivity in<br>Developing Countries: An Aggregate<br>Production Function Approach|Lawrence J. Lau<br>Dean T. Jamison<br>Frederic F. Louat|March 1991|WDR Office<br>31393|
|WPS613 Price-Wage Dynamics and the<br>Transmission of Inflation in Socialist<br>Economies: Empirical Models for<br>Hungary and Poland|Simon Commander<br>Fabrizio Coricelli|March 1991|0. Del Cid<br>39050|
|WPS614 Accountability in Public Services:<br>Exit. Voice, and Capture|Samuel Paul|March 1991|E. Madrona<br>37496|
|WPS615 Socialist Economic Growth and<br>Political Investment Cycles|Heng-fu Zou|March 1991|A. Bhalla<br>37699|
|WPS616 Optimal Nonlinear Incorme Taxation<br>for the Alleviation of Poverty|Ravi Kanbur<br>Michael Keen<br>Matti Tuomala|March 1991|J. Sweeney<br>31021|
|WPS617 International Poverty Projections|Sudhir Anand<br>Ravi Kanbur|March 1991|J. Sweeney<br>31021|
|WPS618 Poverty and Development: The<br>_Human Development Report_and the<br>_World Development Report,_1990|Ravi Kanbur|March 1991|J. Sweeney<br>31021|
|WPS619 Foreign Direct Investment in<br>Sub-Saharan Africa|Laurence Cockcroft<br>Roger C. Riddell|March 1991|S. King-Watson<br>33730|
PlIL Workua(; Puapvr Se-ies

|I';<br>1";'|H<br>u'>"''<br>B<e<br>v.;<l<br>"i<'**Ignory' **<br>I 1:,')_r9'33S.-'3'_|Se<br>C) ;er|Mj'cn**t9Yu1**|SK**ngj**W i'-or|
|---|---|---|---|---|
|WP%6?'|Son',to;e DutD BWybacKs forHany<br>1 (1t4[)*tt'<br>(\(|Er ric3 Detrag,ache<br>vx lflta'|March 1991|S K ng-Watson<br>'~~~~~~~~33<br>'30|
|WPSo '.)|_HovI _-ic!o"<br>c-<br>C,eo!orCourntes<br>Aftect Secondary Market Prices<br>for Develoir'g Country Deot|**Su44**O2Ier<br>Harry Huizinga|Marcr 1991|S King WVa!on<br>33130|
|WPS623|World Bank-Supported Adjustment<br>Programs Country Performance<br>and Etfect'veness|**Vittorio**Corbo<br>Patricio Rojas|March 1991|A Oropesa<br>39075|
|WPS624|Choosing Policy Instruments for<br>Pollut-nControl A Review|Gunnar S Eskeland<br>Emmanuel Jrmenez|March 1991|A Bhalla<br>37699|
|WPS625|How Trade and Macroeconomic<br>Policies Aftect Econom'c Growth<br>and Capital Accumulation in<br>Deveioping<br>Countries|Ramon Lopez|March 1991|K Cabana<br>37946|
|WPSo26|The Macroeconomics of the Public<br>Sector Det**_'ci_**<br>The Case of<br>Colombia|William Easterly|March 1991|R Luz<br>39059|