Letters to the editor

Financial crises hit poor harder

"Financial Crises, Poverty, and Income Distribution" (June 2002) shows how, in times of crises, the poor are hit hard while the income share of the richest increases. But the authors do not speculate why the rich get richer. One reason is that the rich move their assets abroad ahead of crises and are thus able to maintain the assets' predevaluation foreign-currency value; they repatriate some of them after devaluation has made assets denominated in local currency cheap in dollar terms. The rich have better advance information and a much greater ability to shift assets than do the poor. Evidence about private flows of this kind, albeit sketchy, suggests that the data are consistent with such asset shifts. Asset shifts might also help explain why income inequality is so pronounced in Latin America, which has suffered far more financial crises than other regions. My argument should not be interpreted as supporting capital controls, a subject that goes far beyond the confines of this topic.

Guy Pfeffermann

Director, Economics Department

International Finance Corporation

Developing country debt

I read "External Debt and Growth" and "Odious Debt" (June 2002) and am glad to see that the IMF is still concerned about developing country debt, despite the apparent demise of Anne Krueger's proposal for a sovereign debt reduction mechanism. Along with the questions posed in "External Debt and Growth," I would ask another: What is the psychological effect of the debt overhang on the debtor country? The article raises this question with regard to potential donors or investors but not for debtors. I would argue that, for the debtor, the debt burden is both a psychological and an economic obstacle to growth and development. I find it difficult to expect a debtor country to have the will to mobilize domestic resources if it anticipates that most of these resources will go toward servicing debt.

It seems to me that further thought should be given to proposals for bankruptcy and other administrative proceedings whose purpose is to eliminate debt that everybody knows is unpayable and to allow debtors to move on with a clean slate. Most unpayable debt has been written off, except by the international financial institutions, which maintain that their charters or bond ratings will not tolerate a write-off. But if we genuinely want...