The Geneva Papers on Risk and Insurance, 11 (No 41, October 1986), 255-264 The Management of International frade Risks by Donald R. Lessard* 1. Introduction It is now painfully clear that the debt problem of less developed countries (LDC5) is not over. At best, LDCs and their creditors face a decade-long workout; at worst, LDCs, and to a lesser extent their creditors, face even more serious crises than those they have confronted to date. Under such a scenario it is tempting to take a defensive posture, limiting new exposures while seeking to salvage as much as possible from existing ones, but a positive tack would be more constructive. There appears to be great potential for new financing initiatives that will improve the lot of LDCs and provide a attractive return to lenders, especially when the indirect benefits of greater trade with LDCs are taken into account. While this may sound like making water run uphill, it has a logical basis. The "magic" ingredient is to better exploit the comparative advan- tage of various parties in managing international risks. Most current discussions of the LDCs debt problem indicate that the major issue in inter- national risk management is the mitigation and avoidance by lenders of risks of nonperfor- mance by LDCs. However, another equally important dimension is the appropriate allocation of risks faced by LDCs among various lenders and investors.To solve only the first problem is analogous to addressing moral hazard by eliminating all fire and casualty insurance. When viewed in terms of comparative advantage, the management of international risks inherent in the current structure of financing for LDCs is woefully inadequate and there is much room for improvement. This paper is organized in three parts. Part I outlines the sources of comparative advan- tage in international risk management as they apply to LDCs. Part II examines the current structure of external financing for LDCs in light of this comparative advantage, concluding with an identification of the general dimensions along which it could be improved. Part III concludes with a set of concrete suggestions that might be implemented by members of the Berne Union to realize their potential comparative advantage as lenders and insurers. * Stanford University Graduate School of Business and MIT. Sloan School of Management. 255