International financing for developing countries : the unfulfilled promise

International financing for developing countries has failed to fulfill its potential not only because bankers were lending too much or countries borrowing too much, but also because of the structure of the financial arrangements, overwhelmingly general obligation credit largely in the form of floating rate bank loans. Bank debt requires servicing that bears a perverse relationship to developing countries' ability to pay; it fails to shift risk to world capital markets in line with comparative advantage and, consequently, fails to shift responsibility for the selection as well; and it concentrates the risk of default in major commercial banks that represent a small fraction of world financial markets and, as a result, increase the possibility that debt crisis in developing countries will become a world debt crisis. Several steps to correct these shortcomings, including modifications in bank financing and an increased role of nonbank institutions, are outlined.