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Innovation, Unemployment and Policy in the Theories of Growth and Distribution

Edited by Neri Salvadori and Renato Balducci

Innovation, Unemployment and Policy in the Theories of Growth and Distribution increases our understanding about the more relevant economic determinants and policy aspects of the interdependence between economic growth and income distribution.
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Chapter 12: Foreign debt, growth and distribution in an investment-constrained system

Massimiliano La Marca


* Massimiliano La Marca 12.1. INTRODUCTION The discussion of the impact of foreign debt on developing economies, the impossibility of full repayment of debt stocks by crisis-stricken countries and the opportunity of concerted rescheduling or forgiveness have undergone different alternate phases since the first debt crisis of the early 1980s. From an initial position of absolute rejection of debt reduction, to a broad consensus on the necessity of substantial forgiveness for a selected number of countries, the financing vs. forgiving and the ‘sustainability’ debates have been influenced by political feelings and backed by alternative theoretical approaches. Debt paths are ‘unsustainable’ if regarded as too costly or ‘excessive’ for the viability of the system. The analysis of sustainability has been mostly developed within the internal debt management discussion, while for external debt analysis it has too often taken the very simplistic connotation of the ability and willingness to pay back foreign investors. Foreign debt contracts involve firms and/or governments of sovereign countries. Coupled with the predominance of the MIRA (methodological individualism-rational agent) paradigm across virtually all fields of mainstream economics, this has shaped the way of addressing the problem: countries would be homogeneous entities that interplay through imperfect contracts that, given moral hazard and hidden action, suffer mainly from an enforcement problem. In this case rational debtors would ‘promise’ to invest loaned funds, but would have the incentive to consume them or invest them abroad. Therefore, mainstream discussion has favoured mostly financial, incentive-based approaches and contract theory as the exclusive means of...

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