Public debt guarantees and private capital flight

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Significant amounts of private capital have flowed out of several of the more heavily indebted developing countries. This outflow, often called "capital flight", largely escapes taxation by the borrowing-country government, and it has generated concern about the prospects for future servicing of the debt. Imperfect contract enforcement may lead to implicit or explicit government guarantee of foreign debt. The model developed below demonstrates that a government policy of guaranteeing private debt can in turn generate more than one outcome. One such outcome replicates the allocation under perfect contract enforcement: national savings are invested domestically and foreign debt is repaid. The tax obligation implied by potential nationalization of private debt, however, can also lead to another outcome in which national capital flees, and foreign debt may not be repaid.

Original languageEnglish (US)
Pages (from-to)377-395
Number of pages19
JournalWorld Bank Economic Review
Issue number3
StatePublished - May 1987

All Science Journal Classification (ASJC) codes

  • Accounting
  • Development
  • Finance
  • Economics and Econometrics


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