The impact of debt relief in low-income countries

The perceived lack of conclusive quantitative evidence on the macroeconomic effects ofdebt relief in low-income countries has generally blurred the image of debt relief effortsand left the issues of its effectiveness and efficiency open to debate and dispute. Thisthesis seeks to shed more light on the subject by providing some further empiricalevidence. This objective is achieved by performing an empirical investigation of twoeffects of debt relief. First, the study examines the debt relief-new borrowing relationshipin a multivariable regression framework. The results that emerge suggest that, onaverage, debt relief can be beneficial in reducing the future new borrowing of HighlyIndebted Poor Countries (HIPCs). This conclusion, to some extent, is in line with thegoals of HIPCs debt relief initiatives in reducing external debt burdens of those countriesto sustainable levels. However, it presents a challenge to the views of William Easterlyon the ‘perverse incentive effects’ of ‘continuing waves’ of debt relief that are said tolead to further debt accumulation of a similar magnitude to replace old cancelled debt.Second, the analysis explores the influence of debt relief on domestic investmentbehaviour in developing countries. Debt relief is found to have a positive effect ondomestic investment in countries with good policy environments. This result suggeststhat debt relief would be more effective in promoting domestic investment if it were morecautiously conditioned on sound policy frameworks