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Policy Watch: Debt Relief

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  • Serkan Arslanalp
  • Peter Blair Henry

Abstract

At the Gleneagles summit in July 2005, the heads of state from the G-8 countries—the United States, Canada, France, Germany, Italy, Japan, Russia and the United Kingdom—called on the International Monetary Fund (IMF), the World Bank and the African Development Bank to cancel 100 percent of their debt claims on the world's poorest countries. The world's richest countries have agreed in principle to forgive roughly $55 billion dollars owed by the world's poorest nations. This article considers the wisdom of the proposal for debt forgiveness, from the standpoint of stimulating economic growth in highly indebted countries. In the 1980s, debt relief under the "Brady Plan" helped to restore investment and growth in a number of middle-income developing countries. However, the debt relief plan for the Heavily Indebted Poor Countries (HIPC) launched by the World Bank and the International Monetary Fund in 1996 has had little impact on either investment or growth in the recipient countries. We will explore the key differences between the countries targeted by these two debt relief schemes and argue that the Gleneagles proposal for debt relief is, at best, likely to have little effect at all. Debt relief is unlikely to help the world's poorest countries because, unlike the middle-income Brady countries, their main economic difficulty is not debt overhang, but an absence of functional economic institutions that provide the foundation for profitable investment and growth. We will show that debt relief may be more valuable for Brady-like middle-income countries than for low-income ones because of how it leverages the private sector.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/089533006776526166
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 20 (2006)
Issue (Month): 1 (Winter)
Pages: 207-220

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Handle: RePEc:aea:jecper:v:20:y:2006:i:1:p:207-220

Note: DOI: 10.1257/089533006776526166
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  1. Henry, Peter B. & Arslanalp, Serkan, 2003. "Is Debt Relief Efficient?," Research Papers 1837, Stanford University, Graduate School of Business.
  2. Arslanalp, Serkan & Henry, Peter B., 2006. "Debt Relief," Research Papers 1931, Stanford University, Graduate School of Business.
  3. Bulow, Jeremy & Rogoff, Kenneth S., 2005. "Grants versus Loans for Development Banks," Scholarly Articles 11129181, Harvard University Department of Economics.
  4. Jeremy Bulow, 2002. "First World Governments and Third World Debt: A Bankruptcy Court for Sovereign Lending?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 229-256.
  5. Henry, Peter B., 2003. "Capital Account Liberalization, The Cost of Capital, and Economic Growth," Research Papers 1778, Stanford University, Graduate School of Business.
  6. Jeremy Bulow & Kenneth Rogoff, 2005. "Grants versus Loans for Development Banks," American Economic Review, American Economic Association, vol. 95(2), pages 393-397, May.
  7. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  8. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  9. Barry P. Bosworth & Susan M. Collins, 2003. "The Empirics of Growth: An Update," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 113-206.
  10. Timothy Besley & Robin Burgess, 2003. "Halving Global Poverty," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 3-22, Summer.
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