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Debt Relief, Investment and Growth

  • Johansson, Pernilla


    (Ministry of Finance)

Registered author(s):

    The donor community provided around $400 billion in debt relief to developing countries between 1989 and 2004. This paper empirically assesses the impact of debt relief on growth and investment by examining two potential mechanisms. The resource mechanism refers to the resources made available from reduced debt service payments whereas the incentive mechanism takes into account the incentive effects of a reduced debt stock. Based on a sample of 61 developing countries between 1989 and 2004, this study shows that debt relief did not affect growth directly or through capital investment.

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    Paper provided by Lund University, Department of Economics in its series Working Papers with number 2008:11.

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    Length: 31 pages
    Date of creation: 07 Aug 2008
    Date of revision:
    Publication status: Published as Johansson, Pernilla, 'Debt Relief, Investment and Growth' in World Development, 2010, pages 1204-1216.
    Handle: RePEc:hhs:lunewp:2008_011
    Contact details of provider: Postal: Department of Economics, School of Economics and Management, Lund University, Box 7082, S-220 07 Lund,Sweden
    Phone: +46 +46 222 0000
    Fax: +46 +46 2224613
    Web page:

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    1. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
    2. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
    3. Junko Koeda, 2008. "A Debt Overhang Model for Low-Income Countries," IMF Staff Papers, Palgrave Macmillan, vol. 55(4), pages 654-678, December.
    4. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    5. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
    6. Nicolas Depetris Chauvin & Aart Kraay, 2005. "What Has 100 Billion Dollars Worth of Debt Relief Done for Low- Income Countries?," International Finance 0510001, EconWPA.
    7. Jonathan Eaton & Mark Gersovitz, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Oxford University Press, vol. 48(2), pages 289-309.
    8. Dijkstra, Geske & Hermes, Niels, 2001. "The Uncertainty of Debt Service Payments and Economic Growth of HIPCs: Is there a Case for Debt Relief?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    9. Presbitero, Andrea F., 2006. "The debt-growth nexus in poor countries: a reassessment," Proceedings of the German Development Economics Conference, Berlin 2006 22, Verein für Socialpolitik, Research Committee Development Economics.
    10. Robert J. Barro & Jong-Wha Lee, 2000. "International Data on Educational Attainment: Updates and Implications," CID Working Papers 42, Center for International Development at Harvard University.
    11. Cohen, Daniel, 1993. "Low Investment and Large LDC Debt in the 1980's," American Economic Review, American Economic Association, vol. 83(3), pages 437-49, June.
    12. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    13. Junko Koeda, 2006. "A Debt Overhang Model for Low-Income Countries: Implications for Debt Relief," IMF Working Papers 06/224, International Monetary Fund.
    14. David Roodman, 2006. "How to Do xtabond2," North American Stata Users' Group Meetings 2006 8, Stata Users Group.
    15. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    16. David Roodman, 2007. "The Anarchy of Numbers: Aid, Development, and Cross-Country Empirics," World Bank Economic Review, World Bank Group, vol. 21(2), pages 255-277, May.
    17. Ralf Hepp, 2005. "Can Debt Relief Buy Growth?," International Finance 0510003, EconWPA.
    18. Daniel Cohen, 2000. "The HIPC Initiative: True and False Promises," OECD Development Centre Working Papers 166, OECD Publishing.
    19. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
    20. repec:tpr:qjecon:v:106:y:1991:i:2:p:407-43 is not listed on IDEAS
    21. Robert Powell, 2003. "Debt Relief, Additionality, and Aid Allocation in Low Income Countries," IMF Working Papers 03/175, International Monetary Fund.
    22. Serkan Arslanalp & Peter Blair Henry, 2004. "Helping the Poor to Help Themselves: Debt Relief or Aid," NBER Working Papers 10230, National Bureau of Economic Research, Inc.
    23. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    24. Graham Bird & Alistair Milne, 2003. "Debt Relief for Low Income Countries: Is it Effective and Efficient?," The World Economy, Wiley Blackwell, vol. 26(1), pages 43-59, January.
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