Foreign Borrowing and Export Promotion Policies

The problem of allocation of investment is an important issue for a debtor country facing a ceiling on the amount of foreign debt it can accumulate. The optimal solution is 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 is therefore more creditworthy in international markets. Because international creditworthiness is basically an externality, policy can play a role in providing higher returns to export-producing activities.