Resolving the Debt Crisis of Low-Income Countries

Abstract

around a long time, at least since Adam Smith’s favorable mention of it in the Wealth of Nations.1 Kenneth Rogoff and Jeromin Zettelmeyer have recently reviewed the history of the idea, as has Ann Pettifor.2 The current international framework for workouts of distressed sovereign borrowers is woefully inadequate, lacking both the efficiency and the equity protec-tions that characterize well-designed bankruptcy systems. This paper focuses on one part of the problem, namely, the plight of the world’s most highly indebted poor countries, and illustrates the serious problems that have arisen because of the weakness of international institutional arrange-ments. I conclude with several recommendations for reform. Motivations for Bankruptcy Laws Bankruptcy laws have two somewhat distinct motivations. The first is to overcome the collective action problems that arise when multiple cred