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Developing-country resource extraction with asymmetric information and sovereign debt: a theoretical analysis

Published online by Cambridge University Press:  30 March 2001

JON STRAND
JON STRAND
Affiliation:
Department of Economics, University of Oslo, Box 1095, Blindern, 0317 Oslo, Norway
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Abstract

We consider a two-period model of an indebted developing country endowed with a natural resource whose extraction causes negative global externalities, where the country may borrow in period one and there is asymmetric information about its willingness to service its loans. We show that when the resource is large, the interest rate on new borrowing equals the resource growth rate. A greater initial debt level then leads to reduced new borrowing and more rapid extraction. An outside 'donor' may affect the resource extraction of the country. Donor schemes that tie debt reduction to postponing or abstaining from extraction of the resource are more powerful than non-conditional schemes in reducing the extraction rate for governments that actually repay, but may in some cases lead to a greater probability of default through increased debt. While conditional schemes generally are potentially Pareto-superior to non-conditional ones, the welfare of the borrowing country is higher with non-conditional schemes.

Type
THEORY AND APPLICATIONS
Information
Environment and Development Economics , Volume 2 , Issue 3 , July 1997 , pp. 265 - 289
Copyright
© 1997 Cambridge University Press

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Footnotes

This article is part of the research project 'Environmental Policy under Limited and Asymmetric Information', at the SNF Centre for Research in Economics and Business Administration, Department of Economics, University of Oslo. The project has been supported by the Norwegian Science Foundation (NFR). Part of the article was written while the author was visiting the Department of Economics, Stanford University. I thank Michael Dooley, Marcel Fafchamps, Kenneth Kletzer and Jeffrey Williams, and three anonymous referees, for helpful comments on earlier versions. The usual disclaimer applies.