The Political Economy of the International Debt Crisis

Abstract

The international debt crisis has for the most part been viewed in the literature as a macroeconomic phenomenon.¹ The “crisis” has however involved interplay among private banks, debtor country governments, creditor country governments, international institutions, and interest groups in the countries concerned. This paper models the “crisis” from a perspective that takes account of individual behavioral incentives² and shows how debt negotiations (with diverse features such as conditionality provisions,³ swap programs with side payments in kind,⁴ etc.), the involvement of the World Bank and the International Monetary Fund, the active role played by the U.S. Treasury, can be given coherent microfoundations based on self-interest.

An earlier version of this paper was presented at the Conference on Markets and Politicians at Bar-Ilan University, Israel, and at seminars at the University of Guelph and the Kiel Institute of World Economics. I thank Gordon Tullock for helpful comments.