INTERNATIONAL FINANCE AND THE LESS DEVELOPED COUNTRIES

INTERNATIONAL FINANCE AND THE LESS DEVELOPED COUNTRIES

International Finance and the Less Developed Countries Edited by Kate Phylaktis Lecturer in International Finance The City University Business School, London and Mahmood Pradhan Economist Bank of England Palgrave Macmillan

ISBN 978-1-349-10381-2 ISBN 978-1-349-10379-9 (ebook) DOI 10.1007/978-1-349-10379-9 Kate Phylaktis and Mahmood Pradhan 1990 Softcover reprint of the hardcover 1st edition 1990 All rights reserved. For information, write: Scholarly and Reference Division, St. Martin's Press, Inc., 175 Fifth Avenue, New York, N.Y. 10010 First published in the United States of America in 1990 ISBN 978-0-312-04506-7 Library of Congress Cataloging-in-Publication Data International finance and the less developed countries/edited by Kate Phylaktis and Mahmood Pradhan. p. em. ISBN 978-0-312-04506-7 1. Finance-Developing countries. 2. International finance. 3. Developing countries-economic policy. I. Phylaktis, Kate. II. Pradhan, Mahmood, 1957- HG195.1574 1990 332'.042'091724-dc20 89-70269 CIP

Contents List of Tables List of Figures Notes on the Contributors vi vii viii Introduction Kate Phylaktis and Mahmood Pradhan Evaluating the Effects of IMF-Supported Adjustment Programmes: A Survey Mohsin S. Khan 11 Comments: Graham Bird, P.N. Junankar 2 The Securitisation of Developing Country Bank Debt Peter Stanyer 47 Comments: Anthony Saunders, Zannis Res 3 Voluntary Conversions of LDC Debt Paul Dileo and Eli M. Remolona 70 Comments: Colin Mayer, David Blake 4 Inflation, Financial Liberalisation and Bankruptcies in Argentina Carmen Li and Mahmood Pradhan 98 Comments: Monojit Chatterji, Alan R. Roe 5 Capital Controls in Argentina, Chile and Uruguay Kate Phylaktis 119 Comments: Alan Winters, K. Alec Chrystal 6 Money, Financial Repression and Economic Growth Alvin L. Marty 157 Comments: Geoffrey E. Wood, Meghnad Desai Index 188 1 v

List of Tables 1.1 Selected performance criteria in upper-tranche standby arrangements 3.1 Face value of debt conversion authorizations 3.2 Face value of debt conversion authorizations 3.3 Impact of debt conversions in 1988 3.4 Impact of debt conversions in 1988 3.5 Total conversions and the stock of debt 3.6 Expected payoffs 4.1 The firm's balance sheet when there is no inflation 4.2 The firm's balance sheet when there is inflation 4.3 Bankruptcy equation 1976(IV)-1985(I) 4A.l Inflation and uncertainty measure 5A.1 Regression results 5A.2 External debt in the Southern Cone 5A.3 Effectiveness of capital controls 5A.4 Indicator of financial deepening, M2/GDP 5A.5 Types of capital controls in Argentina, 1971-84 5A.6 Types of capital controls in Chile, 1975-84 5A.7 Types of capital controls in Uruguay, 1976-86 5A.8 Degree of tightness of capital controls, Argentina 5A.9 Degree of tightness of capital controls, Chile 5A.10 Degree of tightness of capital controls, Uruguay 6.1 Annual percentage rates 30 72 72 76 77 79 82 102 102 109 111 133 135 136 136 136 138 139 142 143 145 167 VI

List of Figures 1.1 Effects of fund-supported policies 1.2 Effects of fund-supported policies 1.3 Swan diagram 2.1 Yields on 'junk' bonds compared with those on secondary market for LDC debt 5.1 Effects of capital controls 5.2 Effects of capital controls 5.3 Effects of capital controls 6.1 Inflationary finance 6.2 Economic growth and inflationary finance 32 33 36 52 123 124 125 158 165 vii

Notes on the Contributors Graham Bird is Professor of Economics and Head of Department of Economics at the University of Surrey. He has been visiting Professor of International Economic Affairs at the Fletcher School of Law and Diplomacy, Tufts University, and Adviser to both the World Bank and the Commonwealth Secretariat. Recent publications include International Financial Policy and Economic Development, International Macro Economics, and Managing Global Money. David Blake is Lecturer in Financial Economics at Birkbeck College, University of London, and Chairman of Square Mile Consultants Ltd. Author of various research papers in the fields of financial market analysis, pension fund investment behaviour and dynamic econometric modelling. Formerly he was Lecturer in Finance at the City University Business School in London. Author of a forthcoming book Financial Market Analysis. Monojit Chatterji is Bonar Professor of Applied Economics at the University of Dundee. He has held visting appointments at University of California, Davis, the Krannert School of Management, Purdue University, the Indian Statistical Institute, and Instituto Technologico Autonomo de Mexico. His main interests are in Applied Macroeconomics, Labour Economics and Development. He has published widely in the major journals, including the Economic Journal, Economic a, and Oxford Economic Papers. K. Alec Chrystal is the National Westminster Bank Professor at the City University Business School in London. Formerly he was Professor of Economics at Sheffield University. From 1974-76 he was an economic adviser at HM Treasury and in 1983-84 he was a visiting scholar at the Federal Reserve Bank of St Louis. Publications include Controversies in Macroeconomics, Political Economics and Exchange Rates and the Open Economy. Meghnad Desai is the Professor of Economics, at the London School of Economics. Except for a two year spell with the Department of Agricultural Economics, University of California, Beverley from 1963 viii

Notes on the Contributors IX to 1965, has worked at the LSE. Roleman publications: 'Testing Monetarism', 'Is Monetarism Dear!' and 'Endogenous and Exogenous Money' in The New Palgrave Dictionary of Economics. Paul DiLeo joined the Federal Reserve Bank ofnew York in 1985 and worked on developing country debt issues until early 1989. He is now Staff Director of the Foreign Exchange Analysis Division. From 1982 to 1985 he worked at the US Treasury Department in the International Affairs Division. He has a Masters degree from Boston University. P.N. Junankar is Senior Lecturer in Economics in the Public Policy Program at the Australian National University. He has held visiting appointments at Northwestern University (USA), Queen's University (Canada), Indian Statistical Institute (India) and the Australian National University. He has worked on labour economics, macroeconomics, development economics and Marxian economics, and published widely in several journals including Economica, Economic Journal, Oxford Economic Papers and Journal of Development Studies. Author of books on Investment, Marx's Economics and Costs of Unemployment. Mohsin S. Khan is Assistant Director in charge of the Developing Country Studies Division, at the Research Department of the International Monetary Fund. He was previously Research Fellow at the London School of Economics, Adviser to the Central Bank of Venezuela, and Division Chief in the World Bank. He has published widely in the fields of macroeconomics, money and banking, and international economics. Carmen Li is Lecturer at the University of Essex. She has formerly held appointments at the Catholic University of Peru, at the Central Bank of Peru and at the Research Centre in Financial Development at the City University Business School. Most of her writings have been on international sovereign debt. Alvin L. Marty is Professor of Economics and Finance, and Senior Research Associate at the Center for the Study of Business and Government at Baruch College of the City University of New York. He has taught graduate courses at the University of Chicago, University of California at Berkeley, Columbia, Northwestern in the United States. In England he has taught at the University of Essex, Manchester

X Notes on the Contributors University (where he was Simon Research Professor) and the City University of London. He was a member of the Board of Editors of the American Economic Review and Journal of Money, Credit and Banking. He has published numerous articles dealing with macromonetary theory and policy. Colin Mayer is the Price Waterhouse Professor of Corporate Finance at the City University Business School in London. He is co-director of a major research programme on the provision of finance to industry in five countries and heads a team of academics investigating the performance and regulation of financial markets in this country and abroad. He has written extensively on corporate finance, accounting and taxation. Publications include Privatisation and Regulation (with J.A. Kay and D. Thompson), Advances in Corporate Finance and Investment (with J.S.S. Edwards, J. Franks and S. Shaefer) and The Economic Analysis of Accounting Profitability (with J.S.S. Edwards and J.A. Kay). Kate Phylaktis is Lecturer in International Finance and Director of the Research Centre in Financial Development at the City University Business School. A graduate of Brunei University and the London School of Economics, she has worked at the International Monetary Research Project at the LSE and at the Research Department of the Royal Bank of Scotland. She has published a number of research papers on monetary control, exchange rate policy, foreign exchange controls, restrictions in the international trade in services and on financial structures of developing countries. Author of a book Financial Data of Banks and other Institutions. Mahmood Pradhan is Economist at the Bank of England. A graduate of the London School of Economics, he has worked at the University of Essex and the Research Centre in Financial Development at the City University Business School. Author of various papers on inflation, price controls and financial liberalisation. Eli M. Remolona is Senior Economist and Chief of the International Financial Markets Division of the Federal Reserve Bank of New York. He has been with the Fed since 1985. In 1984, he spent the year at the World Bank doing financial sector work. He has taught at the School of Economics of the University of the Philippines and at Columbia University. He has a PhD in Economics from Stanford University.

Notes on the Contributors xi Zannis Res is Senior Lecturer at the City University Business School in London. He has held senior posts as a banking analyst and gilts economist in the stockbroking industry in London. Joint editor of the book International Debt and Central Banking in the 1980s. Alan R. Roe is Senior Lecturer at the University of Warwick and Director of the Warwick Research Institute. He is a former Chairman of the Department of Economics and also spent some years as a Senior Economist at the World Bank. He has written extensively on the subject of economic development with a particular focus on financial sector issues. He has recently published a short volume for ODI entitled Managing Financial Adjustment. Peter Stanyer is the Head of Investment Appraisal at the British Rail Pension Trustee Company. He studied economics at Cambridge and Birkbeck College, London. From 1977 to March 1989 he was employed by the Bank of England, primarily as an international economist. In the mid-1980's, he was seconded for three years to the IMF, where he was a country economist in their East European Division. Anthony Saunders is Professor of Finance at New York University Graduate School of Business Administration, Research Advisor at the Federal Reserve Bank of Philadelphia, and Adviser to the Research Centre in Financial Development at the City University Business School. He is the Editor of the Salomon Brothers Center for the Study of Financial Institutions Monograph Series in Finance and Economics and an Associate Editor of the Journal of Banking and Finance and the Journal of Financial Services Research. In addition, he has served as a consultant on banking matters for the Office of the Comptroller of the Currency, the Congress, the IMF, the World Bank and major commercial and investment banks. He has published widely in major academic journals on banking and thrift industry problems. L. Alan Winters is Professor of Economics and Chairman of The School of Accounting, Banking and Economics at the University College of North Wales. He has formerly held appointments at the University of Bristol and the World Bank. Most of his writings have been in international economics. He has written three books: a monograph on UK exports, a major textbook- International Economics -a bestselling policy paper on the completion of the European Domestic Market 1992.

Xll Notes on the Contributors Geoffrey E. Wood is Professor of Economics at the City University Business School. He has previously held appointments at the University of Warwick, Bank of England and the Federal Reserve Bank of St Louis. His publications include research papers on the demand for money,inflation and the balance of payments; The Financing Procedures of British Foreign Trade (with S. Carse and J. Williamson), Monetary Targets (co-edited with B. Griffiths), Exchange Rate Policy (co-edited with R.A. Batchelor) and Financial Crises in the World Banking System (co-edited with F. Capie ). This book was written whilst Mahmood Pradhan was a Research Fellow in Financial Development at the City University Business School, and the views expressed do not necessarily reflect the views of the Bank of England.