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Debt and Aid, War and Peace: Policy Tradeoffs in Conflict-affected Countries

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  • Menzies, Gordon Douglas

Abstract

A creditor can balance debt recovery and humanitarian goals within an optimal contract framework. The approach ties together two strands of literature that assume either creditor self-interest (Krugman 1988) or benevolence (Addison and Murshed 2003). A reservation utility for the debtor serves as a metric for creditor benevolence. The optimal hyper-incentive contract recognizes that the attainment of health, education, peace and the appeasement of foreign creditors may be conflicting goals. Forgiving debt to motivate paying creditors may therefore have the unintended effect of reducing effort devoted to winning a civil war. For a given reservation utility for the debtor, aid directly targeted towards ending a civil war is a substitute for debt forgiveness.

Suggested Citation

  • Menzies, Gordon Douglas, 2006. "Debt and Aid, War and Peace: Policy Tradeoffs in Conflict-affected Countries," Review of Applied Economics, Lincoln University, Department of Financial and Business Systems, vol. 2(2), pages 1-11.
    • Handle: RePEc:ags:reapec:50148
    DOI: 10.22004/ag.econ.50148
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    References listed on IDEAS

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    1. Tony Addison & S. Mansoob Murshed, 2003. "Debt Relief and Civil War," Journal of Peace Research, Peace Research Institute Oslo, vol. 40(2), pages 159-176, March.
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    Cited by:

    1. Alvarez-Plata, Patricia & Brück, Tilman, 2008. "External Debt in Post-Conflict Countries," World Development, Elsevier, vol. 36(3), pages 485-504, March.

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