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How did highly indebted poor countries become highly indebted? : reviewing two decades of debt relief

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  • Easterly, William

Abstract

How did highly indebted poor countries become highly indebted after two decades of debt relief efforts? A set of theoretical models predict that countries with unchanged long-run savings preferences will respond to debt relief with a mixture of asset decumulation and new borrowing. A model also predicts that a high-discount-rate government will choose poor policies and impose its inter-temporal preferences on the entire economy. Reviewing the experience of highly indebted poor countries, compared with that of other developing countries, the author finds direct and indirect evidence of asset decumulation and new borrowing associated with debt relief. The ratio of the net present value of debt to exports rose strongly over 1979-97 despite the debt relief efforts. Average policies in highly indebted poor countries were generally worse than those in other developing countries, nor were wars more likely in highly indebted poor countries. Over time there has been an important shift in financing for highly indebted poor countries, away from private and bilateral nonconcessional sources to the International Development Association and other sources of multilateral concessional financing. But this implicit form of debt relief also failed to reduce debt in net present value terms. Although debt relief is done in the name of the poor, the poor are worse off if debt relief creates incentives to delay reforms needed for growth.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2225.

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Date of creation: 30 Nov 1999
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Handle: RePEc:wbk:wbrwps:2225

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Related research

Keywords: Environmental Economics&Policies; Strategic Debt Management; Economic Theory&Research; Payment Systems&Infrastructure; Banks&Banking Reform; Environmental Economics&Policies; Strategic Debt Management; Financial Intermediation; Economic Theory&Research; Banks&Banking Reform;

References

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  1. Allan Drazen & William Easterly, 2001. "Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom," Economics and Politics, Wiley Blackwell, vol. 13(2), pages 129-157, 07.
  2. Dadush, Uri & Dhareshwar, Ashok & Johannes, Ron, 1994. "Are private capital flows to developing countries sustainable?," Policy Research Working Paper Series 1397, The World Bank.
  3. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
  4. Joshua Greene, 1989. "The External Debt Problem of Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan, vol. 36(4), pages 836-874, December.
  5. Cohen, Daniel, 1996. "The sustainability of African debt," Policy Research Working Paper Series 1621, The World Bank.
  6. Nouriel Roubini & Paul Wachtel, 1998. "Current Account Sustainability in Transition Economies," NBER Working Papers 6468, National Bureau of Economic Research, Inc.
  7. Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," MPRA Paper 6978, University Library of Munich, Germany.
  8. Easterly, William, 1999. "When is fiscal adjustment an illusion?," Policy Research Working Paper Series 2109, The World Bank.
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