Author Description

Commodity-linked finance has expanded rapidly in the 1980s, but it has mainly been confined to entities in industrial countries. Creditworthiness questions, reinforced by debt overhang, handicap the developing countries in their access to this type of financing. To achieve better risk management in the commodity-dependent developing countries, the authors argue that commodity-linked financial measures have important advantages in the external financing of developing countries as compared to the traditional alternatives of foreign-currency-denominated, general obligation borrowing or direct foreign investment. The authors argue that commodity-linked financing allows developing countries that are overexposed to particular risks, relative to those in the world economy, to shift these risks to world capital markets on an ex ante basis. The study concludes by offering a number of strategic solutions involving the World Bank as an integral participant in both monitoring debt reduction and enacting a technical advice program to assist developing countries manage their financial risk.