Aid Effectiveness, Debt Relief and Public Finance Response: Evidence from a panel of HIPC Countries
AbstractThrough the Heavily Indebted Poor Countries (HIPC) Initiative, substantial amounts of debt relief have been granted to a set of low-income countries as an alternative instrument of aid delivery. The theoretical (and moral) arguments in favour of debt relief are well established. However, the question whether debt relief is a more effective instrument of development assistance in practice is an empirical question. Hence, in this paper we investigate, for a panel of 28 decision point HIPC countries, the intertemporal linkages between debt relief and other fiscal variables such as current expenditure, government investment, taxation and domestic borrowing, in comparison to the effects of more traditional forms of development assistance, namely (non-debt relief) grants and concessional loans. To do so, we estimate a panel VAR and look at impulse response functions. Overall, we find that HIPC (only) debt relief impact on fiscal variables to follow fairly complex dynamics. For example, debt relief initially reduces government investment, but the effect becomes positive after two years, well outperforming other modes of aid delivery.
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Bibliographic InfoPaper provided by Universiteit Antwerpen, Institute of Development Policy and Management (IOB) in its series IOB Working Papers with number 2006.02.
Length: 26 pages
Date of creation: 2006
Date of revision:
Other versions of this item:
- Danny Cassimon & Bjorn Van Campenhout, 2007. "Aid Effectiveness, Debt Relief and Public Finance Response: Evidence from a Panel of HIPC Countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 143(4), pages 742-763, December.
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