Peter Blair Henry

Is Debt Relief Efficient

When developing countries announce debt relief agreements under the Brady Plan, their stock markets appreciate by an average of 60% in real dollar terms—a

Capital Account Liberalization: Allocative Efficiency or Animal Spirits?

42 billion increase in shareholder value. There is no significant stock market increase for a control group of countries that do not sign Brady agreements. The stock market appreciations successfully forecast higher future resource transfers, investment, and growth. Since the market capitalization of U.S. commercial banks with developing country loan exposure also rises—by

Capital Account Liberalization, Real Wages, and Productivity

13 billion—the results suggest that both borrower and lenders can benefit from debt relief when the borrower suffers from debt overhang.

Firm-Specific Information and the Efficiency of Investment

In the year that capital-poor countries open their stock markets to foreign investors, the growth rate of their typical firms capital stock exceeds its pre-liberalization mean by 4.1 percentage points. In each of the next three years the average growth rate of the capital stock for the 369 firms in the sample exceeds its pre-liberalization mean by 6.1 percentage points. However, there is no evidence that differences in the liberalization-induced changes in the cost of capital or investment opportunities drive the cross-sectional variation in the post-liberalization investment increases.

Stock Market Liberalizations and the Repricing of Systematic Risk

For three years after the typical developing country opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of seven. No such increase occurs in a control group of developing countries. The temporary increase in the growth rate of the real wage permanently drives up the level of average annual compensation for each worker in the sample by 752 US dollars -- an increase equal to more than a quarter of their annual pre-liberalization salary. The increase in the growth rate of labor productivity in the aftermath of liberalization exceeds the increase in the growth rate of the real wage so that the increase in workers incomes actually coincides with a rise in manufacturing sector profitability.

Helping the Poor to Help Themselves: Debt Relief or Aid

We use a new firm-level dataset to examine the efficiency of investment in emerging economies. In the three-year period following stock market liberalizations, the growth rate of the typical firms capital stock exceeds its pre-liberalization mean by an average of 5.4 percentage points. Cross-sectional changes in investment are significantly correlated with the signals about fundamentals embedded in the stock price changes that occur upon liberalization. Panel data estimations show that a 1-percentage point increase in a firms expected future sales growth predicts a 4.1-percentage point increase in its investment; country-specific changes in the cost of capital predict a 2.3-percentage point increase in investment; firm-specific changes in risk premia do not affect investment.

The World's Poorest Countries: Debt Relief or Aid?

When countries open their stock markets to foreign investors, firms that become eligible for purchase by foreigners (investible) are repriced according to the difference in the covariance of their returns with the local and world market. An investible firm whose return covariance with the local market exceeds that with the world market by 0.01 will experience a firm-specific revaluation of 3.4 percent. In contrast, the repricing of firms that remain off limits to foreign investors (non-investible) bears no significant relationship to differences in local and world covariances. These findings suggest that the CAPM has predictive power for the cross-sectional repricing of systematic risk when barriers to capital movements are removed.

Risk Sharing and Asset Prices: Evidence from a Natural Experiment

Debt relief is unlikely to stimulate investment and growth in the worlds highly indebted poor countries (HIPCs). This is because the HIPCs do not suffer from debt overhang. The principal obstacle to investment and growth in the worlds poorest countries is a lack of basic economic institutions that provide the foundation for profitable economic activity. If the goal is to help poor countries build the institutions that best suit their development needs, then the energy and resources currently devoted to the HIPC initiative could be more effectively employed as direct foreign aid.

Domestic Capital Market Reform and Access to Global Finance: Making Markets Work

Debt relief is unlikely to stimulate investment and growth in the nations being considered for debt relief under the highly indebted poor countries (HIPCs) initiative. This is because the HIPCs do not suffer from debt overhang. The principal obstacle to investment and growth in the HIPCs is a lack of the basic infrastructure that forms the foundation for profitable economic activity--property rights, roads, schools, hospitals, and clean water. The energy and resources currently devoted to the HIPC debt relief initiative could be more efficiently employed as direct foreign aid.