.. The reason for
both failures is the same: the risk or 'moral hazard' that aid will be
used to replace domestic investment or adjustment efforts, as the case
may be, rather than supplementing such efforts."
In a May 2001 paper, tellingly titled "Does the World Bank Cause Moral
Hazard and Political Business Cycles?" authored by Axel Dreher of
Mannheim University, he responds in the affirmative:
"Net flows (of World Bank lending) are higher prior to elections ... It
is shown that a country's rate of monetary expansion and its government
budget deficit (are) higher the more loans it receives ... Moreover,
the budget deficit is shown to be larger the higher the interest rate
subsidy offered by the (World) Bank."
Thus, the antidote to moral hazard is not this legendary beast in the
capitalistic menagerie, market discipline. Nor is it regulation. Nobel
Prize winner Joseph Stiglitz, Thomas Hellman, and Kevin Murdock
concluded in their 1998 paper - "Liberalization, Moral Hazard in
Banking, and Prudential Regulation":
"We find that using capital requirements in an economy with freely
determined deposit rates yields ... inefficient outcomes. With deposit
insurance, freely determined deposit rates undermine prudent bank
behavior.
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