The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper considers the problem of allocation of investment for a debtor country that faces a ceiling on the amount of foreign debt it can accumulate. It shows that it is optimal for the debtor country to create a more open economy by favoring investment in the export sector over investment in the import-competing sector. The reason is that a more open economy is more sensitive to trade sanctions and therefore more creditworthy in international markets. Because international creditworthiness is basically an externality, there is a role for policy to provide higher returns to export producing activities.