Abstract

In order to regain their international credit-worthiness, the governments of Third World debtor countries must implement far-reaching and coherent policy reforms rather than merely aiming at short-term balance of payments adjustment. This is the major result from an analysis of misconceived economic policies in highly indebted developing countries. Adjustment programs must focus on all major areas of economic policy, i.e. trade, exchange rate, monetary and fiscal policies, as well as reduce policy induced distortions in relative prices in factor and product markets. The governments of creditor countries must help to overcome the transfer problems of debtor countries by significantly liberalizing restrictive import policies, rather than relying on more government interventions into the international transfer of capital. A publicly enforced provision of fresh money to developing countries would cause severe moral hazard problems and could give rise to a new round of debt crises.