Foreign Debt 619

Howevcr. in futu]e pelLq{s t-|1c np-pgrtgity gg$ o.f b"cor"\

Foreign Debt and Capital Accumulation .lppalcnt, and tritwc*gSc_-q4ions m'ay fiavc-Tiffiieni
lorrou'ing 'on
-perceptions
1he I
By
b.lS!_lr_ qnd th9 opportunity costs_9f"5oriowing. J
In this paper, we compare the case of foreign borrowing with a scenario in
Horst Siebert which the country accumulates capital by postponing consumption. We study
the optimal level of foreign debt and of the capital stock. We also point out
the impact of debt on the time profile of consumption of the debtor coiintry.
, contents: I. Introduction. - Il. A Model of Borrowing
and Acc rmulation. - In the usual two-period analysis [Chipman, 1985], the periods of debt
rfi. Oplimafit' Conditions. - IV. Optimal Capital Accumulation. - V. The Time Profile repayment and debt service are collapsed into the second period only. In
oiconrurnptiin and Debt. - vI. Capital Accumulation without Borrowing. - VII. Bor- contrast to this approach, we use a continuous time model which allows to
rowing for Capital Accumulation Only. - VIII. What Can Go Wrong? analyze the properties of the time profile of debt service and debt repayment

I. Introduction
[Bardhan. 1967; Sachs, 198a] g
v!eld!-s--b! nt value of welfare relative to the non-
apital accumulation is at the core of economic development. An increase We establi ine for caoital accumulation and
in the capital stock allows a country to move upward along its produc- for consurn
tion funition or, if new technologies are incorporated into the new
capital good's, to shift its production function to a higher level. Historical may make it more dlffiEuliTor the debtor country to pay interest and repay
e*pe.ieice suggests that any process of industrialization must be driven by debt.
accumulating cipital. This holds for production capital in the industrial base
as well ur f- hu*un capital. Moreover, social overhead capital like infra- II. A Model of Borrowing and Accumulation
structure in transportation is needed to make use of economies of scale and to
Consider an economy that maximizes thp present value of utility W from
increase the size of markets. I-n a closed economy, cqptlg!-can only,lggq9.-qgglatll
consumption C
ed by postponinS,consumption In an oPen economyt, a.country-q1yi"tt9: I * ,r

i@tty, ho*.u*"ly.,at th e opp_ortun ity cost of p-avt:g Tl:resf1o_leP$tn 9J u: f ei'W (C) dt (1)
th?a'ebt in ffiffids-'" \ | :f +L^
0
In order to simplify the notation, time indices of vaqiilbles are omitted. In (1),
ul. bv pottpof"e- :o+1,'fpttnJ!+ry
---------.:^-

ins. that is the EffiTfproiftr,iiivitv of capital, 6 is the country's given time preference rate, T is terminal time and the period
utility function has the usual properties
W.>0.W""(0and n: - CW""/W.>0 (2)
the that is the cost
-4
Terminal time T can be assumed to be given exogenously or it can be
for consum determined endogenously. Output Q is produced with capital It and labor L
$\' rate on debt
.l@Sfr',' according to a neoclassical production function
qysdap.
Q < F (K, L) with F,> 0. Fii( 0, F,,) 0 for i, j : K, l, (5)

and hence a t value of consumPtion; ital accumu Th@is given and c!jl$g! ovelljme; the initial
capital stock I(, is also given, The capital stock changes over time according
tO
Remarh: This paper was stimulated by discussions in the course "lnternational
Resource

Management', of the Kiel Advanced Studies Program. I acknowledge comments

from the participants ri:r-dK (4)
as well as from an anonymous referee and G. Franke, w. Krelle, E. Mohr. H.H.
Nachtkamp'
lVl. Rauscher and L Walter.
u,here I is gross invcstment and d is the rate of depreciaticrn. A dot over a
I On the case in which an open economy transforms its initially given resource stock into capital variablc denotes a change of a variable over time, a hat is the rate of change.
I
compare Siebert [1985, Ch. VI]
i Consumption in any period is equal to production minus gross investment
I
620 Horst Siebert Forelgn Debt 62t

minus interest payment on debt (rB) plus borrowing (B) Optirnality condi{ ioirs are
c:Q-rB-I+B 8Z
:0 :)W.:
SC
-p (8a)
Debt, B, and the change in debt, B, are expressed in units of commodity Q,
and r is the real interest rate assumed to be given. The country is small in the 8Z
world capital market. Note that ths_gcreasg_Ln debt may be used fot.
:}A (8b)
8I:O
in . Rearranging, we have
8Z
'Lt1-.3:C+ I -e+rB -- cu (5)
sa:0 (8c)

where the right-hand side denotes the deficit, (or, if negative, the zurplus) in .82
i:6I-DK:>I :61+dI-pF" (8d)
the balance of trade and services and the left-hand side indicates the balance
)
in the capital account with B 0 standing for capital irnports (and B 0 (
8Z
denoting capitai exports, i.e. repayment of debt). P:6P-DB:>0 :6-r (8e)
In teiminal time T, debt must be repaid or financial assets are accumulated

B(r) < o (6) Defirring a J-function according to van Long and Vousden [1977], we have

Eq (5) is the budget constraint for each period; (5) and (6) together represent
l:fB(r)+oK(r) (e)
rvith
an intertemporal or dynamic budget constraint [Glick and Khavar, 1986].
In terminal time, the capital stock must be nonnegative E: e 6ip (T) (ea)

K(r) > 0 (7) rB(r) -0 (eb)

O:e511(T) (9c)
Applying the classification of Glick and Khavar [1986], the model
aesciiUes the problem of an optimizing borrower. Nonoptimizing behavior oK(r) :0 (ed)
modelled by specific behavioral consumption functions including public .-ilg11';:0 (9e)
choice approaches to government spending or rigidities preventing optimality
of consumption and investment over time is not considered. Also, we do not ivhere H : Z - Ir [F(K,L) - Q] is the Hamiltonian function.
study joini maximization problems of the borrower and the lender or
st.ategic behavior [Sachs, 1984]. "fhe borrower is assume4"to be a smail-l IV. Optimal Capital Accumulation
.ount* having tro impact on the i et; I
m tel From (8b), we have for the rate of change in the shadow prices i: p so
that from (Bc), (8d) and (8e) we have
lsmaff couh ' I
Default risk or countrv risk issues are not considered. Finally, the optimizing ./ r: F* (K") - d (10)
n.lo-da does not expticitly analyze intertemporal market equilibria as tn
overlapping generation models [Buiter, 1981; Schmid, 1987].

III. Optimality Conditions

The Lagrangean function Z is given by

z:w (C) + itl-dKl

+ PIC+I-Q+rBl
+ plF(K,L)-Ql (8) / .A crpital rich country with Ku > K+ will reduce its capital stock if capital can be used up for
R I (,.5umFtion
{/ I
 \

622 Horst Siebert Foreign Debt 623

Figure 1 - The Optimal Capital Stock, K*, for Capital Accumulation ArgIS_d > r Then p, o> 0.rhat is 05 g a!ij_l?_0 sothat p rises,-11f
0:
F(K) absolute ternrs. aud consumption is reiiucecf oGr tlmEl-
I
Eq. (5) can be written as

A Q : r'1x*,1; - d K't' : c + rB - B : c+N (i1)

r#;*ilfiil
-(
F{ k,,l::'"jlT':9:eto(l0b@ustriseovertime.thatis),*f
N:-C)0(for6)r).
LY:1.:?il:rl:',",1t;
rrrylrvrr t !I v

with the capital stock being accumulated instantaneously in the firstl

period, borrowing for capital accumulation will occur in the first period. In
I
addition to borrorving for capital accumulation. the country also incurs dcbt I
fo_f:g::u [p!.str- [ -O_lr Bo rrowin g for co nsum ption. Jr-6i,6veffi av 6e I
rt.*tjl"{ ojg t"t'"I3!periods iri-rial[ConsiderEebse, in which the-ititial I 1y!
Ko K-
.upfiutlttlErt.s flaentiaaf to lfJbptimal capital rto.k K*. tt.nJith 6 > r, t
U."rr"",irrg t"!t , iion only'- )
neously in the first period due to borrowing. --:<+_ ---_
lnrtrall.v we have
Eq. (10) is illustrated in Figure 1 where tan q is r + d, K* is the optimal
capital stock and I!
is the initial capital stock3. K*-I(o represents debt Qcc<:>N(o(:)r!1u.u -(11a)
incurred for capital accumulation.
Once the ontimal ,^^pitalstq"L ic there is- no net investment. (
and thus r B/B. This implies that debt increases in the initial J'erind(s). The\
'eached,
Grorr tnu"rtrngnt is-a constant fractiW- of ttn-c.rrnsiant (optimal) c4jlel increase in debt is larger t@t so that interest is oaid I
stocTlffiEtpq! is completely specified by the production function, and it tnroEffi-
remarns constant. - q"eg: c3n:glpLlg+5-I9gu99d.un{N itjlggtqd, that is N becomes
smaller in absolule terms. Eventually. we must have
f...jil
V. The Time Profile of Consumption and Debt Q: C (:) N: 0 (:) rB_B (1 1b)

Consumption p"Lo!_gUllle*n:plmal
in if-lbq-Ugrgtlql rltility
dmal if-jhg_ngrglnq! gtilitv of
o. solhat r: B/B and {g!!-t59_q*ty{b tLgl$glgj!rate. Dqg_to th-e continging
^l
npll .o "ry tle user costs
gf debt or the
of gqstsl-of reduction in consumption. N continues to riielow becoming posiiive *lttr
),/ :owing must be equal to the
[ borr-ovEnErr.TCtin"Ee user cosislf-5-oriowing tht %-*
--
shadow price of capital accumulation, tr, and the shadow price of output,
'
;r. Q>c(:)N)o(:)rB-B)o 11lc)

W.(C) : - P: I: P
(10a) and r)B/8. The incrcase in debt becomes smaller, and eventually in period t,
we have
Consumption changes over time according to
B: 0 {:) Q: C+ rs (11d)
e:-*o (10b)
sothat@sufficientfclrconsumotionandintereStpayment.Fromt,
3 The steady state properties with respect to the optimal capital stock can also be illustrated with on. r rnr-rttun-ro tnat B
%
the traditional C-K-phase diagram. The implications of the model can also be analyzed by the overall Note that we hal,e lrom (11)
optimality condition 6 - W" = Fx (K) - d which follows from (su) - (8.)
r: TtjggIgl$.!99.-
discount 6 - W.. musr be equal to the interest rate which must be equal to the nct plo9gctiviu of
'--'-t'',f"--
B:rB+C(0 fort)t' (11e)
@ t9-99l",rnr,ffitrriile ovcr lime c.an ga.slV !f]_{1t_.91f:l tl.ri9 E-g1qll o.ntrlnglitv
rom frf: W;tEpijgiE ? b. ihe auove
ffiition.Eijffirrce, ler6)r.ThenW">0which'iiomW"=W.,.Cimplies-C(0.Theabove r) so that B is a concave function and does not fall asymptotically to zero. In
.u@l.u! ul:gb.ln,tlP{,tfi as a rir?F.-et
-j- eq.ilibritlm
1orylirpn
where th9-19ft !r315[!-{e mr.r-dels terminal tirne. the antount rcpaid is not infinitesimally small.
th. ,iiini[6r'iiio=i-6f l"rlshetO$d_Og*4tLLu!3 $9e r9pr91e4.!e_!he,-!qvestme,nl,behayrror -of
trfrr e" itrt".f"t"p*ul iquilibrium can be characterized by a time path of the interest rate driving llr 6)
:o"r-gp!gl-p19!!" is steered bv the shzulow.priqe o_ We trave 0 n
and for conilffidi
J-*
consunrption is rcduced tlver tinre. rhis decline in
rhJionsumotiori-6fr-illfiFiilEitm-refrf-d6cl3'ionrTo-wc rE"isniew to'l-i H Nachtkamp'
 -:-{l

Horst Siebert Foreign Dcbr 625

624
Figure 2
spells out the long-run balance-of-payments implications of
loreign borrowing. Cogsumplion_..lgo declineso dqs to a relatively high time
preference rate, that is 6 ) r.

Figure 2 - Long-Run Balance-of-Payments Implications of Foreign Bonowing

0
rB
c

,
nr-ffiorizon T ( -. Then the transversality .Lrl L;-)'
conditions (9a) and (gb) toiether with a rising - p and thus
a positive - p (I) > 0
( L.&'(--,-)'
imply that'B(l: o.oe6t has to be zero
- p (r) n"@4@jn{.Oq
in T' As a matter of fact' the
*
'liobp:i.e
gesg!ie'-eFr9ii9++1 !1':
{4;y.
ffi
th;;'specii:tiLbs-iqi-tial
; d thus
;and -s-o-Guio! ti"-4-arli-{e !l In 9 PI9!l' .
'n"iqqirlgsg4"Jq':!iG-!"dil"ilY{r1C9|Taryp'ineiutt'e-r'urjielpe{od
wrili6i;b=,ti*-;;p'lel-lto&!qGii;;"i'T^t'6'*+:LttT:S,-::?
(10), the
t'1
-rto.t condiion
the transveriality tbaDue io ttie optimatity condition Capital accumulation occurs instantaneouslv in the first period; qpd debt
."pit"f ,.*uint .ontiuni up to terminal time T' But due to the
rises for some periods to finance coniurnption. norro*ing ii reauceqiffi
the consumption
m|notonicity of the consumption piofile a discontinuity in stops ir] t'. From then on, debt is repaid and uqinc.eutinglv Iu. f
il Tie .upit"t stock is not used for consumption
;."fti; T is ruled out.
capital stock and output is beine used fp f e5t
in T. It is used to repay debt' For iinite terminal time' the The te,rm N:rB-B in (ll l,,hutig.tn *@f
d.b.,
debt are zero. can also be interpreted as the trade balance. Prior to t'. N ( 0 is the imoort\ I
ExtendingTfurtherandfurtherintothefuture,thisresultwillhold.The
time' ae lus. Since th;;; N riseil;er
- p (T) continues to drive the system' With B falling over
-- -' -- )I
shadow price time the countrv
country has to 1 t'. I
o t'; after t'
rB will fail, but debt repayment will rise over time' th. .otnt e. The model thus /
-F
"*t(
When T is determined endogenously' and if T < -' the
transversality
specifies the time profile of the balance of tradE6EiiEI'iiven bv tIe sEaci6lv /
condition (9e) simPlifies toa prjg.g o;l-g[ebt. The nrodel implies a debt cyclc over tinre. I

.-m 1W(C) - W"C ) : 0 <:> W. : W(C)/C

(12)
For C-{, W-0 and thus W-CW. *0. Therefore the transversa.lity condition is

CG):0' Condition 12 can only be reached in finite time if lim e{r H(T) : 11* eir p (T) rB (T) : o
This implies that T*- T,*-
t"lbtz*. with the usual assumption that the marginal utility of consump-
tion is infinite with C approaching zero, C(T)
: 0 cannot be reached in finite *'hich implies r po lim .-t B (T) = 0. This can only be satisfied if the term
T*6
converges so we

times. musthaveB<r.Thisrsconsistentq'ithB(T) :9,6111o.T--wemayalsohaveB(T)>0.WithT--.

the penalty p (T) ( 0 loses its bite. Note that the transversality condition is consistent with Wc (0) -' -.
a The transversality condition for optimal T is
For T' -. the transvenali tl conditi on for the capital stock is lim trn etr K lT; : 0. Eq. ( 1 0b) continues
.-fl {W(C) + p (dK+ C - Q + rB)} = 0 T r-
(9d) implies (12)' to require constant optimal capital stock so that K(T):K*(T) >0 is consistent
a with the
*'hich tr:gethei with conditions (Sa), (9b) and
time T is transversality condition. For T - *. the capital stock is no{ used to repal' debt.
5 Allowing rerminal time to approach infinit],. thr. transversality condition for optimal
6AsufficientconditionforaconvcxfunctionC(t)isC<0andC)0.From(8a)wehave
lim 1s or' [w(C) - Cwc] +.e{r p (T)B(T) * po"-'t (dK - Q)} = 0
T-€ \r,
- \t'2... w..w((
dK-Q is a constant Moreover' we (': t6-rt and C = (6-rt . C
With po = e-(6-r)T p (T). The third term approaches zero since \\' -. \\'---
.on.u"" utility function. Since c\\'. ) 0, rve have
r,"u" wlc ) w" {or C ) 0 in the case ui o i
6 ) r, *'c havc \\'.\\'... , W..2 - I -=,- js satisfied, for instance,
w)w.-cwc>0. $
For C ' 0. This cun dition for an isoelastic
utilitr" luntti,,n.
626 Horst Siebert Foreign Debt 627

VI. Capital Accumulation without Borrowing VlI. Borrowing for Capital Accumulation Only
why does a country bonow in the first place? can it improve its welfare by \.['e have so far discuss.d ut]jpruy th@l
only reiying on capitai accumulation from internal saving? If we study capital acqumulg$n as rlle[3s for ggl9sryIion. Fn (tG) - d > .
tgdt* tu, i, ir-
optimal to borrow for investment; 6 ) r implies that it i.s uro.rhr rt';te io
in a closed economy, (5) simplifies to c:Q-I, that is, consump-
"".umulation
tion is given by output minus gross investment, and the equation of motion bor@,nsg@!b. However, t p-
for the capital stock changes into tjg4^if th%ilterest rate is.higher than thq time preference r:ate, i.e. r > 6. Then
0
( 0, and consumption increases over time. This implies a hieh p in ibsofiG
r:Q_c_dK ( l3)
situ
terms in the initial n.]b,e
The Lagrangean then is given bY bur
accumulating capital,
or
ts. T@lgllon
Z:W (c) + cccurs insf imptiesJorro**TTot
^tQ-c-dKl
+p[F(K,L) -Q] (t4)
D
capital accurnulation3 t-inly. , the
counlrl a:tivel{
with the optimality conditions .contribu
consurnptiorr.Thir .onur-ption p.ofi
tponing
rrowecl.
8Z
:0 :) W": tr
se VIII. What Can Go Wrong?
9!=:
8Q
o :) A @g1ng inrplies restraints for future periods in terms of giving up goods
(or gcnerating a balance-of-trade surplus) in u_tdStlg pqy irit?EiTn-iliEpay
'82 dcbt.Inourmodelofoptimalborrowing.theffing
i:or-ffi:)i:6+d-Fr country@e
lre, of course, taken into account. A
rnru] benelit from_a unit borrowed will be fffiier tfrin or) eqiat tfrtre
ruLg_ggp{gl-p9o.r* o-untrv, that is F*
(&) ) 6 + d,.I#!!t, that is-., utb
.oldnptiq'1tn".'ees$-qygU!$ e rbe c9g!!r-b-!9.-eg!-g-bie!'- ge +altv,o'1 | In the real world, quite a few phenomena can affect ihis intertemporal
cofisumption initial]y. aitowing more consuq!!19! with capital being I optimality condition so that initiall5r chosen time profiles of consumption and
acq'mulatqd. debt repayment will no longer be followed. Including such phenomena into
The optimal capital stock now has to be interpreted as the_steady state our framework allows a richer analysis.
capital stock being reached in the long run when 6 + d: F* (Ko)' Wltgg!
borlowing, the gqpital-poor count1){ Yll egcg!4ghleg s-aalg1 qap1lqlsloil i{
*" *-**i O > r$ow thE tim6 preterenceTate (assumed to be identical in the- discount rate is the e
;# etermines the lone-run cqgltal] may be caused by a high population presffi
stock. Moreover, the capital-poor country cannot accumulate the (smaller) political dcman ds of uot.@Iffi.$. such@
ciilitat stock instantanei,u$?s in[g b9!rgw11s case, but il q99$Jirn9'
rrianv,-iT"fiust-;ilri gi a Lg1v9r coniumpii-on lfygl]lrl!4ty, using a hlgh.er 8 In this case u'e have from (l
l) that
p.nutiy on l'oiiiiimbtioii in oidcr tgjicg"Sitliinat iadlial accumulation. Its C<Q.-->\>o<=;'r)BrB (i)
conGmFiion-patnrc" in rigure 4 is on;"1iffi6i'l':te! !f of the
-outlt,Ofew becauso the consumption level is lo*,initiallJ. From (ll) u'e aiso have N: - C and consequently
-"iri.;fim"as il - rB .' c. fti)
\ T-helilvantage of bcrrowing is to allow a higlle_r preqent value of vqelfqle \\rcanruleoutB-0becausethisimpliesQ:c+.rB.c)vertimeCrises,sothatwithQconstant,
lfro.ry.or,,rr.plioht The higher timegofjl-.-*oj*gg$-qry-tp!91iJ "f!ls irytigl It has tu fnll uhich is impossihlt'for R = 0. wc can rls{) rulc out A > 0. Then tiir implies ti > 0
I oeri u-a s *,ttu.[h t h e red.ggglq grisnln pfon o9s!b,11!t199 pe! o$ s' Ior ri-sing C. Dcht lvould risc progressively over tinr0. hrrt the trlnsversality condition implies I)(T) :0.
t' '.:==>- s -p '9f {ut!q19
Conscqucntlv B < 0. Note thal this case docs not reach a steady state for consumption due to thc
\ ' )
A lower present value of welfare in the borrowing case (for 6 r) relative to the non-borrowing rcpavnl.nl r;ldcbt. p falls in absolrrte value orcr tinrr'so that corrsurnptjon can be increased frgrn
. case clearly would contradict optimality because in the borrowing case the country can decide not t0 period to period.
)
borrow. If it decides to borrow as it will for 6 r, borrowing increases its welfare.
\Vrltllirtschdtrli(h(,s Arrhrv lld (I\XIII l
 Foreign Debt 629
H or-st Siebert
628
Eclrrit-i' capital is air alternative to foreign borrorving. of course, equity
low u,cight on user costs, and it thus
a.ll#'tpt'on capital implies dividend payments, and in the 1970s developing countries did
initially. *rti.r,i, u,"tiuqv low incentlv@ ttre
thF burden rl)t want to see this transfer occur. But at the same time, dividend payments
ou.r tirne. of c<.rurse,
Effiu,ing casc. -p f,urffii"',nor-*-@tv ha'c thc ad'antage of not implying a constant obligation to pay. They aliow
mcire llexibility with respect to some of the unfavorable events discussed
above. with equity capiral, the country can shift the risk of unfavorable
$ e'"'ents to the l'oreign firm. Note, however, that foreign firms will anticipate
these risks, and if the risks are sufficiently high, the country may not be able
penalty on consumption both initially and
higher borrowing i*pfitt u ftigtttr Io attract loreign direct investment. Moreover, in addition to economic risks,
in later periods. .or.,rv"*il u. on.u lo*., consumption profile.
rt. the foreign firms will consider political risks such as changes in taxation,
productivity of capital is known,
In the optimi,ution *ua.l, the marginal regulation and property rights. In addition to this property of risk shifti;rg,
but in realitl'. it is an';-r"t';;-;;uit" li expectations. on' tht"marginal
crirrity capital alleviates the transversality condition in the sense that oniy
productivity of capital Jo not materialize
as in Poland in the 1970s' the dcbt incurrcd for consumption has to be paid backro.
payments as shown in Figure 2'
countr!' is stuck *itft int*"tt and
principal Finaily, thc phenomena that make it more difficult for the debtor country
eiiher the consumption path must
but it cannot g.n.ru,"'itr. orip", Cj thus, of t, pay interest and repay debt may lead to a breach of contracts [Sachs,
be suppressea o, O.Ui tiff be curtailed' O{ colrse, jfe strategy 19841. As is illustrated in Figure 2,with the passage of time, the utility derived
'"*itt
.upiii'u..umulation as a means for economic development is not too
from borrowing will be reduced and the opportunity costs will rise. At a
characterized by a production
promising if the couriryt i*ftnofogy.is nlon.rcnt of time t sufficiently far away from the initial period the burden of
2) suggesting only a small
function on a lowleri"i";.i ah;" iil rigure borrou'ing, rB - B, may seem high whereas utility derived from consumption
accumulation oPPortunity
A similar argument t"iuttt to the terms
of trade'.Int|:ry9:l tffi#:, ma!' appcar lou'. The political process tends to have a short memory, and in

real terms
borrows in+-'--< and in real ttrlqlSo ,ftg11n; t"; 3f@tt thc perceptions of the debtor country the advantage of the time profile co
or.cr C., is lorgotten.
are nins constant over ttme
an intertempoTal senseJ fet !qud' '" T"' Iorergrr
ftr" unotyri, can be made rictter by aslum]nS that the country borrows
curren cy an d by i'tr"d*i;;';^;'it i;' it'"'*p:,11- : " 11::lt::"': i:l*: :i
^;i'il;;;"'"' i reduced
References
ty''*l:wer foreign currencv
ffi il'Jil#tuuuilubi. toiinance debt service
9':;.(rB B)'
-
Bade. Robin. Optimal Grouth and Foreign Borrowing with Restricted Mobility of Foreign
Capital . Ittternational Economic Reuiew, Vol. lj, I972, pp.544-552.
e"ar-niil;;t instantaneously for accumula-
In the model tt. u*l"niUo"o*ta is used Bardhan, Pranab K., "optimum Foreign Borrowing". ln: Karl Shell (Ed.), Essavs in Theory ol
of debt into physical capital
ting capital (and for .";;;ri";]. tt
i, trunrt.r Optinral L,conomic Growth. Cambridge, Mass., 1967, pp. 117-12g.
and funds borrowed for investment *
may be interrupted ut tt*tuf itttuntt'' Buiter' willem H., "Time Preference and International Lending and Borrowing in an
This-occurs for instance when the time O'eriapping-Generations \Lode|". Joumal of Political Economy,yol.89, 19g1, pp.769-797.
may be used for.on,u*piion'
for capital accumulation may even Chipman, fohn S., A 'two-Period ModeL ol International Trade and Pavments. Universitiit
preference rate increasls' funat intended
accumulating capital may not occur l(onstanz, \\rorking l)aper, 194. Konstanz 1985.
be used for capital exports. Moreover,
In these cases' not enough real
instantaneously and may be time consuming' Glick, Reuven. Honri f. Khavar, "The costs and Benefits of Foreign Borrowing: A sun'ey of
;;"rp;;;;erutea in itte future necessary for the debt service' .\lulti-I)criod \lodels"'. lournal of Deuelopment Studies, Vbl. 22, 1986, pp.279-299.

lf contrary to the r.;dei. i;;-t"""'* rt@'u:d In{ernatirrnal i}lonetary Fund (IMF), Intemational capital Markets. Deaelopments and
ffi,i,",. ar.?**.offiffiEb'e to service the Prospetts. \lhshingron 1986.
"".'i*
deiif from current otttPut' van Long. Ngo. Neil J. \busden, "Optimal Control Theorenrs". In: John D. pitchford, Stephen
f . lurrrrrr.slrr itids.), :lpplications of Control Tlrcory- to rlconomic Analysis. Amsterdam

1977. pp I l- i.i
gN,Jtethatifu'ereducethetimepreferencerateparatnetricallyandifwemakeitsufficientll'low'
in the boirowing case' i e' the C5-^curve
will
we nray have 6 ( r, and ,,*"'o'"ii" "it"""*pii"t
< 0' :t1-::lsllRtion increases t'o- !^:-,1
we have
'n"
have a sinrilar shape as the Ca-curve P the parametric varirtion
'' flrrrran:rrr:;ilirvrondition(9b) onlyrclatestodebtandnottooquitycapital.Eq.(5) hastobe
d > FK (lq) initially so that by i(ii\r(i tL) !i!eortttltr)(iiitr tiividtrirl ililJlrtnts.l'his idca $,ds l)oinlcd out byan anon1,'mous relerce.
d-r = (6+d) - FK (tt") which irnplics 6+
a capital-rich country'
it,n. itr. i,"i"i.n.. ratc the country has become
630 tlorst Siebert
Foreign Debt
..Internationale Kredite ttttt rttlciurchsetzbaren Forderungen,.. In: Armin The Effects of Debt versus Equity Inflows on
Niehans, }iirg,
intiiitiiot" Schuldenkrise' Schriften des Vereins fiir Socialpolitik'
Gurowski (Hrsg.), Die
N.F., r55. Berlin 1985' pp. 151-179' Savings and Growth in Developing Economies
studies in Internatio-
Theoretical lssues in Intematioilal BoftowinH Princeton
sachs, feffrey,
nal Finance,54. Princeton, N.f ' 1984' By

Schmid,Michael,ExtemalDebtandtheWealthofNationswilhoaerlappinsGenerutions.
--Worting Ulrich Liichler and Peler Nunnenkamp
paper, Nr. 2-87, Universitit der Bundeswehr' Hamburg 1987'

Schneider,Helmut,optimalesWachslwnundAuslandsaerschuMung-einDiskussions-
beitrag. Arbeitspapiere, Reihe A' Nr' 4' Ziirich 1984
[ntertemporal Theory ol contcnrs: I Introduction. - II. A Discussion of the Basic Model. - IlI. Equation
siebert, Horst, Economics ol the Resource-Exporting countrv specification and Sratement of Hypotheses. - IV. The Empirical Results. - V. con-
Supplv and Trade Grcnwich 1985'
clrrsions. - Appendix,

I. Introduction
Eine offene Volkswir!
Zusammenf assutrg: Devisen,.n',0 '"0 **italakkumulation' - thc onset of the international debt crisis, various new schemes and
aufnehnl", r<"pi"r zu akkumulieren. In dem Beitrag wird der Fall der ir.rcc
schaft kann Kredit
"rn
Auslandsverschuldung mit eincm Szenario verglichen,
in dem ein Land seinen Kapitalstock inno'ati'e financial arrangements ha'e been proposed for the purpose
.uttuu. Die Inzideni der Verschuldung auf das. Zeitprofil des ol alle'iating the external debt problems currently experienced by
;;;'il;;nr.ri.it Modell spezifrziert auch d.as Zeitprofil
Konsums und der V..r.1turJung *fa analysiert. Das many developing countries [The World Banl<, l9g5]. Common to many o]
der Kreditaufnahme werden
der Handelsbilanz. Die inte.tei,po.uten Opportunitiitskosten these proposals is the intent to alter the external capital structure of
werden neJingung.n abgeieitet, denen sich die Verschuldung fiir
ertjrtert, und es _unter
lohnt. Im Paradigma des Modells devcloping countries toward incieasing the proportion of claims based on
Kapiralbildung una r<unrun1 oa.i t u", rur ai". Kapitalbildung
wird'
Konstellationen aiJrti.rt, denen es fiir das verschuldete Land schwieriger some form of risl< and profit sharing (i.e., equity participation). This applies,
werden
""t.. for example, to recent measures designed to promote foreign direct invest-
Zinsen und Tilgung zu zahlen.
ments (such as the N{ultilateral Investment Guarantee Agency), debt-equity
swap arrangements (introduced in chile), the promotion of mutual funds
R6sum6:Dettedtrangdreetaccumulationdecapital-Unedconomie.ouvertepeut containing stoclis of developring country industries (such as the Korean
I-lauteur compare le cas d'un emprunt
emprunter d l,etranger po"ur accumuler du capital_ Fund). and contingency arrangements, such as commodity-linked bonds, with
un ,".6nu.io dans lequel un pays accumule du capital en remettant
la
eiri"g"i
"t..
consommation locale. Il analyse l,effet de I'empiunt sur
le profil de temps de la consommation clauses that index their returns to the price of key commodities cxported by
le profiide temps de la baiance commerciale. Les co'ts the borrower (rcccnt debt renegotiations involving Mexico and venezuela
et de la dette. Le moddle ,pZ."in.
joJ "urri et les-conditions sont sp6cifi6es sous lesquelles il includcd such clauses).
d,opportunite d,.n prunt..
"r"rvrei
estprofitabled,emprunterpourl'accumulationdecapitalet/oupourlaconsommation.Dans
phenombnes qui le rendent plus difficile au
A shift in the external capital structure, as projected by these measures,
le contexte du moddle t'uu't"* air.ut. quelques
pu', igfir.", de payer f., i"ier.tr et de'rem'bourier les dettes et m.me de rompre le contrat I'ields the obvious benefit of reducing the extremely heavy debt-service
burden of sonre developing countries. From a broader welfare perspective,
de cr6dit.
however. can it be claimed that a developing country would be better off with
a lower external debt-equity ratio? This question has recently been addressed

Resumen:Deudaerlernayacumulacit5ndecapital'-Enunaeconomiaabiertaunpais
in terms of a choice-theoretic model based on an agent-principai approach
puJ. .naruaursLr a los .i..to, a. acumular capital. En este trabajo se compara el endeuda- [L2ichlcr, 1985]. That analysis arrived at the familiar result that both a
capital intemamente posponiendo
miento exrerno con una situaci6n en la cual un piis acumula first-best "cooperative" or a second-best "non-cooperative" equilibrium are
sobre el perfil temporal.delconsumo y
.i .onrr,no. se analiza el impacto del endeudamiento
el perlil temporal del saldo.comerciai se estudian 1,'t-rssiblc- outcolncs ,lf the capital transfer negotiations between foreign
de la deucla. El modeio,"*uie.t especifica
tna'"raun-,i.nio y t.
deiivan las condiciones baio las cuales principals ancj thc rnanaging authorities of a developing country. It was then
los costos de oportunidal'a.l
resulta beneficioro .norulurr. f"iu capital y/o para consumir..En.el contexto del shor.rn that if conditions conducive to a cooperative equilibrium pertain, a
".un,,ul". al pafs deudor el pago del
modelo se discuten utguno, fen,in",eno, que podrian difiiultar shilt lrorn debt firrunced to equity financc,d transf'ers, leaving the total capital
y que podrian inducir a cuestionar el contrato de jntlou' the sarrre. rvould yield an unambiguous welfare
senicio de la deuda v A. iu a."Ju misma, improvemcnt lronr thc
cr€dito. iicu'point ol the capital irnporting nation. with a non-cooperative environ-
 b
9c+r'6=-
. ./o -- Lo

cBa Bc
rb>gc
lbl = 79nb.

Sc).' I _
g--a a-; f 9'-ol > g.-
l
 L=t

s. "e- 7 +rB

6 Y-L =
6 *" 6