Abstract The idea of “voluntary channeling” of Special Drawing Rights (SDRs) has gained prominence as a potential mechanism for providing concessionary financing to emerging market economies and low-income developing countries. This article critically assesses the redistributive potential of voluntary channeling by analyzing the SDR system as a web of interlocking balance sheets governed by idiosyncratic accounting rules established in the late Bretton Woods era. We distinguish three prevailing interpretations of voluntary channeling: direct transfers of SDR holdings between countries, transfers to development banks, and lending to IMF-sponsored Trusts. Using balance-sheet methodology, we show that using SDR holdings always entails perpetual interest payments and therefore cannot be costless for donors. Only lending SDRs via IMF Trusts can shield donors from direct costs, as contributors are compensated at the SDR interest rate. However, the subsidy required to make Trust lending concessionary must be sourced elsewhere and has often also been financed through IMF surcharges and cross-subsidization from indebted emerging economies. As a result, voluntary channeling tends to redistribute resources within the Global South while allowing advanced economies to avoid meaningful wealth transfers. One promising idea for reform to overcome these shortcomings entails turning SDR allocations into tradable liabilities.
Abstract The ongoing sovereign debt crisis in low-and middle-income countries (LMICs) was signalled by instances of default or failure to meet external debt obligations denominated in hard currencies. But the response to the crisis has included attempts to restructure domestic sovereign debt issued largely in domestic currencies. Such moves have been justified by identifying the crisis as one of excessive aggregate public debt rather than just unsustainable levels of external debt. There is a need, it is argued, to reduce the gross financing needs (foreign and domestic) of debt-stressed governments that have accumulated excessively high levels of aggregate – domestic and foreign currency – public debt. This assertion ignores the difference between the stress associated with servicing debt in domestic and foreign currency. Governments can mobilise domestic resources using their sovereign right to tax and central banks have control over domestic currency supply, whereas both have little control over foreign currency availability, which depends on net foreign revenues earned and on net inflows of foreign incomes, transfers and capital. While domestic debt restructuring releases domestic resources, it does not automatically yield the foreign currency needed to relieve external debt stress. In addition, since the holders of domestic sovereign debt include citizens deploying their savings to invest in pension funds, insurance products and mutual funds, and commercial banks parking resources in ‘safe investments’, restructuring that debt through explicit or implicit haircuts is bound to be economically destabilising. Past savings would be eroded with adverse impact on current demand, and the damage to the balance sheets of banks would restrain credit to the detriment of consumption and investment. This makes implementation of domestic debt restructuring costly and difficult, as experience illustrates. Given that context, the paper examines the possible reasons why when less developed countries face external debt stress, the IMF and global finance insist on domestic debt restructuring as part of conditions associated with provision of emergency balance of payments finance or the restructuring of foreign debt.
Abstract The article presents a simple three-sector macroeconomic model that incorporates key structural features common to many Latin American economies. The model allows for the formal identification of three benchmark levels of the real exchange rate (RER). The macroeconomic equilibrium RER is the level consistent with the simultaneous achievement of internal and external balance (i.e. full employment and a sustainable balance of payments). The social equilibrium RER corresponds to a state in which workers, at full employment, obtain a real wage consistent with their income aspirations. The developmental RER is defined as a benchmark level that ensures the labor-absorbing tradable sector earns a risk-adjusted rate of profit comparable to that in developed countries, thereby fostering investment. The three-RER-levels framework provides a unified analytical setting to organize and compare alternative theories developed in Latin America – including unbalanced productive structures, distributive conflict, structural inflation, macroeconomic populism, and stop-and-go cycles – and to clarify how different configurations of the benchmark RER levels underpin competing diagnoses and development strategies in the region.
Abstract This paper develops a structuralist computable general equilibrium model to analyze how commodity-dependent economies respond to typical external shocks and policy interventions. The model is calibrated to a 2010 Social Accounting Matrix for Zambia that integrates national accounts with socio-economic and environmental data and international classifications of occupation, employment status, and institutional sectors. Zambia’s 2010 economic structure is used as an archetypal case of commodity dependence, characterized by under-diversification, structural dualism, and weak sectoral linkages. The model captures the differentiated behavior of industries and institutions under sector-specific constraints. Through comparative-static simulations, we assess the effects of external shocks (a mining export boom and currency depreciation) and of policy interventions typically regarded as development-friendly (green energy investment, wage increases, targeted transfers, and progressive tax reforms). We show how commodity booms generate output growth alongside limited employment gains, declining diversification, and adverse distributional effects; how currency depreciation is contractionary due to inflationary pressures and cost-push dynamics; how investment in non-mining and capacity-constrained sectors promotes diversified, employment-rich growth; and how distributive policies, particularly progressive tax reforms and targeted transfers, enhance equity outcomes with minimal macroeconomic trade-offs. While the framework can be recalibrated to any economy, the mechanisms and conclusions identified here apply broadly to commodity-dependent economies that share these structural features.
Abstract The present paper delves into the intricacies of trade on child labour. Theoretically, developing countries exporting child labour-intensive products can experience increase in child labour employment (termed as substitution effect). However, if trade creates employment opportunities for parents and leads to a more equitable income distribution, child labour incidence may fall due to the income effect. In this context, the present paper investigates the impact of trade liberalisation on child labour. For this purpose, we have identified the net exporter of child labour-intensive goods for a sample of 39 developing countries. Instrumental Variable estimation results indicate substitution effect for the period 2002–2019. The results suggest that trade alone may not be enough to eradicate child labour. Supporting domestic policies like education, health, and more equitable income distributions can have a favourable impact on reducing child labour incidence. Prioritising investments in education, social protection, and inclusive economic opportunities is essential to ensure that the gains from trade liberalisation translate into meaningful and sustained reductions in child labour.
