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Aid effectiveness, debt relief and public finance response: evidence from a panel of HIPC countries

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  • Cassimon, Danny
  • Van Campenhout, Bjorn

Abstract

Through 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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Paper provided by Universiteit Antwerpen, Institute of Development Policy and Management (IOB) in its series IOB Working Papers with number 2006.02.

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Length: 26 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:iob:wpaper:2006002
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  1. Paul R. Krugman, 1988. "Financing vs. Forgiving a Debt Overhang," NBER Working Papers 2486, National Bureau of Economic Research, Inc.
  2. 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.
  3. Nancy Birdsall & Stijn Claessens & Ishac Diwan, 2002. "Policy Selectivity Foregone: Debt and Donor Behavior in Africa," Working Papers 17, Center for Global Development.
  4. Cashel-Cordo, P. & Craig, S.G., 1988. "The Public Sector Impact Of International Resource Transfers," Papers 24, Houston - Department of Economics.
  5. Jeremy Bulow & Kenneth Rogoff, 1991. "Sovereign Debt Repurchases: No Cure for Overhang," The Quarterly Journal of Economics, Oxford University Press, vol. 106(4), pages 1219-1235.
  6. Cassimon, Danny & Vaessen, Jos, 2007. "Theory, practice and potential of debt for development swaps in the Asian and Pacific region," Economic Systems, Elsevier, vol. 31(1), pages 12-34, March.
  7. Alexander Pivovarsky & Benedict J. Clements & Sanjeev Gupta & Erwin H Tiongson, 2003. "Foreign Aid and Revenue Response; Does the Composition of Aid Matter?," IMF Working Papers 03/176, International Monetary Fund.
  8. Peter S. Heller, 2005. "Understanding Fiscal Space," IMF Policy Discussion Papers 05/4, International Monetary Fund.
  9. Ndikumana, Leonce, 2002. "Additionality of Debt Relief and Debt Forgiveness, and Implications for Future Volumes of Official Assistance," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  10. Pack, Howard & Pack, Janet Rothenberg, 1993. "Foreign Aid and the Question of Fungibility," The Review of Economics and Statistics, MIT Press, vol. 75(2), pages 258-65, May.
  11. Cohen, Daniel, 1996. "The sustainability of African debt," Policy Research Working Paper Series 1621, The World Bank.
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Cited by:

  1. Cordella, Tito & Missale, Alessandro, 2013. "To give or to forgive? Aid versus debt relief," Journal of International Money and Finance, Elsevier, vol. 37(C), pages 504-528.
  2. Danny Cassimon & Stijn Claessens & Bjorn Van Campenhout, 2007. "Empirical Evidence on the New International Aid Architecture," IMF Working Papers 07/277, International Monetary Fund.
  3. Tari Lestari, 2014. "Can Indonesia’s Fiscal Policy be Sustained, with Exploding Debt?," Working Papers in Economics and Development Studies (WoPEDS) 201415, Department of Economics, Padjadjaran University, revised Nov 2014.
  4. repec:nam:befdwp:3 is not listed on IDEAS
  5. Danny Cassimon & Bjorn Van Campenhout & Marin Ferry & Marc Raffinot, 2015. "Africa: Out of debt, into fiscal space? Dynamic fiscal impact of the debt relief initiatives on African Heavily Indebted Poor Countries (HIPCs)," International Economics, CEPII research center, issue 144, pages 29-52.
  6. Danny Cassimon & Marin Ferry & Marc Raffinot & Bjorn Van Campenhout, 2013. "Dynamic fiscal impact of the debt relief initiatives on african heavily indebted poor countries (HIPCs)," Working Papers DT/2013/01, DIAL (Développement, Institutions et Mondialisation).
  7. George Mavrotas & Peter Nunnenkamp, 2007. "Foreign Aid Heterogeneity: Issues and Agenda," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 143(4), pages 585-595, December.
  8. repec:dau:papers:123456789/10905 is not listed on IDEAS
  9. Fuhmei Wang, 2009. "The effects of foreign borrowing policies on economic growth: success or failure?," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 12(4), pages 273-284.
  10. Danny Cassimon & Dennis Essers & Karel Verbeke, 2015. "What to do after the clean slate? Post-relief public debt sustainability and management," BeFinD Working Papers 0103, University of Namur, Department of Economics.
  11. Gravier-Rymaszewska, Joanna, 2012. "How Aid Supply Responds to Economic Crises : A Panel VAR Approach," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  12. Danny Cassimon & Bjorn Van campenhout, 2008. "Comparative Fiscal Response Effects Of Debt Relief: An Application To African Hipcs," South African Journal of Economics, Economic Society of South Africa, vol. 76(3), pages 427-442, 09.
  13. Philip Michael Kargbo & Kunal Sen, 2014. "Aid Categories that Foster Pro-Poor Growth: The Case of Sierra Leone," African Development Review, African Development Bank, vol. 26(2), pages 416-429, 06.
  14. repec:unu:wpaper:wp2012-25 is not listed on IDEAS
  15. Pincin, Jared, 2012. "Foreign aid and political influence of the development assistance committee countries," MPRA Paper 39668, University Library of Munich, Germany.

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