Foreign Debt, Sanctions and Investment: A Model with Politically Unstable Less Developed Countries

Alberto Dalmazzo and Giancarlo Marini

International Journal of Finance & Economics, 2000, vol. 5, issue 2, 141-53

Abstract: This paper analyses the underinvestment problem in less developed countries (LDCs) characterized by political uncertainty. It is shown that both the strategic use of foreign debt and direct foreign investment can reduce the extent of underinvestment, determined by insecure property rights, when international sanctions are operative. In particular, foreign debt may be the most effective tool to increase the investors' share and promote physical capital accumulation. Copyright @ 2000 by John Wiley & Sons, Ltd. All rights reserved.

Date: 2000
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