Debt Relief and Civil War

Reducing or writing off the debts of the 41 heavily indebted poor countries (HIPCs) can potentially reduce social conflict by releasing resources from debt-service to enable governments to make fiscal transfers that lower the grievances of rebels (when conflict is partly rooted in grievances over past allocations of public spending and taxation). To explore these issues, this article presents a model of a civil war between a government and rebels, with both sides maximizing their expected utility from the states of war and peace. The government may accept debt relief but then renege on any promise to donors to use the resources to buy peace and instead keep the resources for itself and raise its military capability. The outcome that prevails depends on which party (peace or war) has the greatest influence on the government of the day. Unfortunately, even if debt relief is forthcoming, the fiscal system may be so institutionally weak that it cannot achieve the promised transfer. Also, the rebel leaders may capture most of the fiscal transfer, leaving the grievances of their followers to ferment into further conflict. And a transfer that could have prevented conflict may be insufficient to stop a war once it begins. The international community has only limited influence over these problems. But the international community can change the modality of debt relief itself so that peace-seeking governments can receive faster debt relief, thereby at least ensuring that peace is not delayed by the inevitable difficulties that wartime governments face in meeting donor policy conditionality.