North-South : The implications for multinational banking

International finance should be of great value to developing countries because their potential growth paths are ‘out of step’ with the world economy and because the gambles they must take to develop are much more diversifiable in the context of the world economy than locally. However, the actual benefits of North-South finance have been limited by an overreliance on non-specific bank credit with the inherent limitations and by errors in judgement by both borrowers and lenders. In fact, the current crisis threatens to reverse many of the earlier gains. While the current crisis is primarily the result of the world recession, the severity of its effects on lenders and borrowers reflects three key aspects of bank credits: (1) its perverse real repayment patterns, (2) its specific nature which implies that risks are transferred only through generalized non-performance with its attendant deadweight costs, and (3) its concentration in a small but critical segment of capital markets. These characteristics would be serious even with ideal behavior by lenders and borrowers, but they also can lend to inappropriate and possibly erratic behavior. Specific suggestion for restructuring the system of North-South finance are given including (1) smoothing repayment patterns, (2) increasing repayment flexibility, (3) increasing risk-bearing non-specific finance, (4) increasing non-recourse financing, and (5) increasing project-specific risk capital.