The incentives for domestic investment in debtor countries are
influenced by the terms of their external obligations and by the system of
taxation utilized to provide government revenue for debt payments. It is
well known that existing debt contracts could be altered to improve the
incentives for investment but this has proven difficult to accomplish,
perhaps because individual creditors have incentives not to agree to such
changes. In this paper we show that a simple tax credit scheme that can
be implemented unilaterally by the debtor government can overcome at least
some of the inefficiencies caused by existing debt contracts.
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