Patents, Appropriate Technology, and North-South Trade

We consider the differential incentives of the North and the South to provide patent protection to innovating firms in the North. The two regions are assumed to have a different distribution of preferences over the range of exploitable technologies. Due to the scarcity of R&D resources, the two regions are in potential competition with each other to encourage the development of technologies most suited to their needs. This provides a motive for the South to provide patent protection even when it constitutes a small share of the world market and hence has strong free riding incentives otherwise. A benevolent global planner will set equal rates of patent protection only when it weights the welfare of the two regions equally. We find that the comparative statics of the Nash equilibrium exhibit considerable ambiguity. Numerical simulations in the benchmark case yield the following results: (i) when the technological preferences of the two countries become more similar, the level of patent protection provided by the South is reduced; (ii) when the relative market size of the South is increased, the South enhances its patent protection. In both cases, the level of Northern patents is relatively insensitive.

Voluntary choices in concerted deals : mechanics and attributes of the menu approach

When sovereign debt trades at a discount on secondary markets, a market buyback increases the secondary market price. The wealth of private creditors increases because part of the funds used in the repurchase is a transfer payment to them. This transfer of resources can be mitigated by imposing a capital gains tax on the remaining debt. The authors show how this can be achieved by including exit and new money options in a menu of options from which creditors can freely choose. The menu approach imposes an implicit tax on the capital gains on the remaining debt by requiring lenders that do not exit to extend new loans in proportion to the debt they retain. The menu approach does not require that particular choices from the menu be assigned to each lender. Instead, it implements debt reduction through a price system, allowing different creditors to select different portfolios in equilibrium from a common set of options. The authors illustrate some of their results by analyzing the recent Mexican debt agreement. They show how to read through the complex financial acrobatics to estimate the net debt reduction. Funds provided by international financial institutions benefited both Mexico and its creditors. Mexico directly retained 62 percent of these resources and the banks 34 percent.Economic Theory&Research,Banks&Banking Reform,Strategic Debt Management,Environmental Economics&Policies,Financial Intermediation

Sovereign debt buybacks as a signal of creditworthiness

To solve the puzzle of attitudes toward debt buybacks, the authors use a model that combines considerations of debt overhang with the possibility of asymmetrical information between debtor countries and their creditors. In this environment, a debt overhang may create disincentives for a country to undertake a worthwile investment, and debt relief may induce the country to invest and to increase its output, raising future debt repayments. The authors show that debt buybacks can credibly reveal a debtor country's willingness to invest and to repay in the future when offered relief today. In equilibrium, countries that buy back debt get debt relief and those that do not buyback debt do not get debt relief. The authors tested and failed to reject two implications of their model : 1) that banks grant debt relief to countries that have a swap program in place, and 2) that the secondary market price of country debt, conditional on a swap, is higher than the debt price, conditional on no swap.Economic Theory&Research,Strategic Debt Management,Environmental Economics&Policies,Banks&Banking Reform,Financial Intermediation

Patents, appropriate technology, and North-South trade

In this paper, the authors discuss the possibility that the North and South may have differing technological needs. Just as the North would like to develop drugs against cancer and heart disease, and the South drugs against tropical disease, so the North's labor saving innovations are less useful in the South, where labor is cheap. Southern patents might promote the development of technologies appropriate to the South that might not have been developed if there were no patents. In this case, lower patent protection in the South would not benefit the South and increased patent protection in the South can hurt the North when the resources to go into R&D are limited. The authors develop a formal model for inteellectual property rights, emphasizing the dimension of technological choice. This model allows for a continuum of potential technologies, with a range of preferences in the North and South; free entry in the R&D sector rather than duopolistic competition; and gradations of patent protection. The report concludes by reviewing the results of the analysis.ICT Policy and Strategies,General Technology,Economic Theory&Research,Earth Sciences&GIS,Environmental Economics&Policies

Long term prospects in Eastern Europe : the role of external finance in an era of change

Private investors have an important role toplay in the ongoing process of reform in Eastern Europe. So external creditworthiness is crucial to a successful transition. Large government borrowing crowds out the formation of private contracts between international investors and domestic entrepreneurs and firms. Given the overall credit ceiling in international lending, the public sector needs to curtail its external borrowing to leave room for the private sector. This also implies that public debt reduction may be especially desirable in the highly indebted countries of Eastern Europe. Rather than flood the public sector with new loans, international organizations should attempt to improve domestic creditworthiness by supporting debt reduction and borrowing restraints during the transition period. Debt for equity swaps represent an attractive vehicle for debt reduction in the highly indebted countries of Eastern Europe. Such schemes, when tied to the privatization effort, are not inflationary. They simply represent a swap of public liabilities, and they create value to the extent that foreign private investment leads to positive externalities. The challenge will be to create swap mechanisms that will allow the Eastern European countries to retain a large share of those gains.Environmental Economics&Policies,Banks&Banking Reform,Economic Theory&Research,Municipal Financial Management,Public Sector Economics&Finance

Conditionality and debt relief

Six years into the debt crisis, questions about the relevance of policy measures to alleviate the crisis still abound. Conditionality by international financial institutions and rescheduling by commercial creditors have been dismissed in favor of debt reduction as strategies for restoring the creditworthiness of heavily indebted countries. This paper argues that the combination of conditionality and new private money - if properly interpreted and correctly implemented - should not be dismissed too lightly. The paper contends that liquidity (the availability of current resources) in the debtor country is probably as important an incentive for a country to invest and adjust as having a small enough debt stock outstanding. Debt reduction alone, is not as efficient as simultaneously providing liquidity and debt reduction if liquidity were available. The combination of new money and conditionality will work if the debt stock is small enough and enough new money is available.Environmental Economics&Policies,Economic Theory&Research,Strategic Debt Management,Financial Intermediation,Housing Finance

An analysis of debt-reduction schemes initiated by debtor countries

In evaluating the benefits of a voluntary debt reduction scheme, look for efficiency gains that allow both debtor and creditor to gain. In particular certain debt reduction operations can: (i) increase the incentives for growth in highly indebted countries; (ii) allocate risk more efficiently between debtor and creditors; and (iii) signal the credibility of a country's willingness to adjust its economy. Market-based debt conversion is more likely to improve the debtor nations welfare when: (i) the opportunity cost of foreign exchange is low; (ii) there is great probability of default with a deadweight loss to the creditor; (iii) private rather than public debt is swapped for equity investments; (iv) the country has no other way of signalling its commitment; and (v) the country has an extreme case of debt overhang.Strategic Debt Management,Economic Theory&Research,Environmental Economics&Policies,Housing Finance,Financial Intermediation

Are buybacks back? Menu-driven debt-reduction schemes with heterogenous creditors

There is always some price that is low enough so that a debtor country gains by buying back some of its debts. Similarly, there is always some price that is high enough so that creditors gain by selling their debt claims. What is needed is a mechanism that allows trades to take place at some price within this range. One mechanism, the market buyback, has been called a boondoggle. However, market buybacks are too expensive from the debtor's point of view and faced with a buyback bid, each creditor has incentives to hold onto its claim unless the bid is larger than the value of debt after the deal. Concerted debt-reduction agreements can overcome this type of coordination failure, but they may be difficult to reach in practice because of the heterogeneity of creditors. The authors argue that the menu approach to debt reduction retains the advantages but not the inconvenience of buybacks and concerted agreements. They introduce a model of bank asset pricing in the presence of tax incentives and deposit insurance. They then derive the equilibrium level of exit and new money for a distributionof creditors facing a given menu program. They show that the optimal menu includes some positive level of debt repurchase in almost all cases - challenging the argument that buybacks are undesirable. The authors conclude that the menu program dominates the standard buyback and new money approaches.Banks&Banking Reform,Economic Theory&Research,Financial Intermediation,Financial Crisis Management&Restructuring,Municipal Financial Management

The menu approach to developing country external debt : an analysis of commercial banks'choice behavior

This study provides evidence that bank characteristics are significant determinants of commercial-bank choice behavior when confronted with a menu of options. It develops a theoretical model of bank choice behavior and empirically tests its implications using data from the 1988 Brazilian financing package. The empirical results show that bank characteristics are capable of explaining over 80 percent of this choice. One of the main implications of the theoretical model is that under risk-neutrality assumption, financially stronger and more exposed banks prefer to exit. The findings have several important implications for the new debt reduction strategy. (i) First, larger debt reductions operated on a market basis are more costly, per unit of debt reduced. In order to increase debt reduction, weaker banks must be convinced to exit, increasing the needed exit price. (ii) Second, the exit price depends on the strength of the banking industry, and thus, the effectiveness of the present debt strategy is affected by changes in the world economy. In periods of booms, banks become stronger and exit prices are reduced. (iii) Third, regulators can affect the cost of debt reduction by altering the regulatory framework within which the banks operate. (iv) Fourth, LDC debt reductions are beneficial to the deposit insurance agencies of the major creditor nations.Financial Intermediation,Economic Theory&Research,Municipal Financial Management,Financial Crisis Management&Restructuring,Banks&Banking Reform

Distributional aspects of debt adjustment

The report explores how the formulation of debt repayment policies can be affected by the nature of the decisionmakers and the strength of various interest groups. The authors argue that small penalties can be enough to deter default if they hurt the interests of groups that are closely associated with policymakers, especially when the costs of debt service can be shifted to groups with less influence on decisionmaking. The authors'analysis indicates that : i) governments backed by constituencies from the non-traded good sectors of the economy will tend to default more; ii) without capital mobility, capitalists in the import-substitution sectors will tend to oppose the repayment sought by capitalists of the export sectors; iii) workers interests will depend on the share of import in their consumption basket; iv) with capital mobility, labor will oppose the extent of debt repayment sought by capitalists in both the export and the import substitution sectors; v) self-fulfilling external default with large capital flight is more likely to occur when the default penalty is inelastic and when a left-wing government is in power; and vi) with perfect bargaining, governments with constituencies that oppose large debt repayments get a better debt settlement.Economic Theory&Research,Environmental Economics&Policies,Banks&Banking Reform,Strategic Debt Management,Public Sector Economics&Finance