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Analytical aspects of the debt problems of heavily indebted poor countries

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Author Info

  • Claessens, Stijn
  • Detragiache, Enrica
  • Kanbur, Ravi
  • Wickham, Peter

Abstract

A group of heavily indebted low-income countries (HIPCs), most in Sub-Saharan Africa, has continued to experience external debt problems. Because the HIPCs'economic characteristics and external imbalances are very different from those of middle-income countries, the analysis of debt problems and debt-reduction must be modified and complemented in important ways. Therefore, the authors revisit the methodological issues underlying debt sustainability analysis, as well as theory and empirical evidence on how large debts affect economic performance. Their main question is: Should consideration be given to more upfront debt reduction for HIPCs, over and above that provided under current mechanisms, or should debts continue to be refinanced, subject to conditionality? Ongoing refinancing with conditionality reduces moral hazard and gives countries an incentive to maintain good policies. However, this approach entails transition costs, can create uncertainty, may lack credibility, and can impede local ownership of reform programs. Upfront debt reduction can create moral hazard problems and may weaken the incentives for maintaining sound policy. There are theoretical arguments about why a high level of debt can impede investment and policy reform. Although empirical evidence concerning the hypothesis that HIPCs suffer significant adverse effects from their large debt overhang is inconclusive, evidence from middle-income countries suggests that debt reduction can benefit an economy if the policy environment is right. Whether there should be further debt reduction for specific heavily indebted low-income countries depends on the facts for each case and requires quantitative analysis of data about different forces at play in the countries involved.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1618.

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Date of creation: 30 Jun 1996
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Handle: RePEc:wbk:wbrwps:1618

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Related research

Keywords: Strategic Debt Management; Economic Theory&Research; Environmental Economics&Policies; Payment Systems&Infrastructure; Banks&Banking Reform; Strategic Debt Management; Economic Theory&Research; Environmental Economics&Policies; Banks&Banking Reform; Public Sector Economics&Finance;

References

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  1. Jonathan Eaton & Raquel Fernandez, 1995. "Sovereign Debt," Boston University - Institute for Economic Development 59, Boston University, Institute for Economic Development.
  2. Borensztein, Eduardo, 1990. "Debt overhang, credit rationing and investment," Journal of Development Economics, Elsevier, vol. 32(2), pages 315-335, April.
  3. Johnson, J.H. & Wasty, S.S., 1993. "Borrower Ownership of Adjustment Programs and the Political Economy of Reform," World Bank - Discussion Papers 199, World Bank.
  4. Claessens, Stijn & Oks, Danel & van Wijnbergen, Sweder, 1994. "Interest Rates, Growth and External Debt: The Macroeconomic Impact of Mexico's Brady Deal," CEPR Discussion Papers 904, C.E.P.R. Discussion Papers.
  5. Detragiache, Enrica, 1992. "The simple dynamics of a debt crisis," Journal of International Money and Finance, Elsevier, vol. 11(6), pages 552-566, December.
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Citations

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Cited by:
  1. Patricia Alvarez-Plata & Tilman Brück, 2006. "External Debt in Post-Conflict Countries," Discussion Papers of DIW Berlin 613, DIW Berlin, German Institute for Economic Research.
  2. Ralf Hepp, 2005. "Can Debt Relief Buy Growth?," International Finance 0510003, EconWPA.
  3. Ratha, Dilip, 2005. "Demand for World Bank lending," Economic Systems, Elsevier, vol. 29(4), pages 408-421, December.
  4. Idlemouden, Khadija & Raffinot, Marc, 2005. "Le fardeau virtuel de la dette extérieure. Une revue de la littérature à l'aune de l'initiative « pays pauvres très endettés » (PPTE)," Economics Papers from University Paris Dauphine 123456789/4089, Paris Dauphine University.
  5. Mathias Hoffmann, 2002. "Cross-Country Evidence on the Link between the Level of Infrastructure and Capital Inflows," Trinity Economics Papers 200210, Trinity College Dublin, Department of Economics.
  6. Robert Powell, 2003. "Debt Relief, Additionality, and Aid Allocation in Low Income Countries," IMF Working Papers 03/175, International Monetary Fund.
  7. Menbere Workie Tiruneh, 2004. "An Empirical Investigation Into the Determinants of External Indebtedness," Prague Economic Papers, University of Economics, Prague, vol. 2004(3), pages 261-277.
  8. Ralf Hepp, 2005. "Health Expenditures Under the HIPC Debt Initiative," International Finance 0510005, EconWPA.
  9. Birdsall, Nancy & Claessens, Stijn & Diwan, Ishac, 2002. "Will HIPC Matter? The Debt Game and Donor Behaviour in Africa," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  10. Hoffmann, M., 2002. "Cross-Country Evidence on the Link between the Level of Infrastructure and Capital Inflows," CEG Working Papers 20024, Trinity College Dublin, Department of Economics.
  11. Marco Arnone & Luca Bandiera & Andrea Presbitero, 2005. "External Debt Sustainability: Theory and Empirical Evidence," International Finance 0512007, EconWPA.

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