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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.

Suggested Citation

  • Cassimon, Danny & Van Campenhout, Bjorn, 2006. "Aid effectiveness, debt relief and public finance response: evidence from a panel of HIPC countries," IOB Working Papers 2006.02, Universiteit Antwerpen, Institute of Development Policy (IOB).
    • Handle: RePEc:iob:wpaper:2006002
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    References listed on IDEAS

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    1. Ndikumana, Leonce, 2004. "Additionality of debt relief and debt forgiveness, and implications for future volumes of official assistance," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 325-340.
    2. Peter S. Heller, 2005. "Understanding Fiscal Space," IMF Policy Discussion Papers 05/4, International Monetary Fund.
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    5. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
    6. Nancy Birdsall & Stijn Claessens & Ishac Diwan, 2003. "Policy Selectivity Forgone: Debt and Donor Behavior in Africa," World Bank Economic Review, World Bank Group, vol. 17(3), pages 409-435, December.
    7. Cashel-Cordo, Peter & Craig, Steven G., 1990. "The public sector impact of international resource transfers," Journal of Development Economics, Elsevier, vol. 32(1), pages 17-42, January.
    8. 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.
    9. 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.
    10. Cohen, Daniel, 1996. "The sustainability of African debt," Policy Research Working Paper Series 1621, The World Bank.
    11. 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.
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    Cited by:

    1. Pincin, Jared, 2012. "Foreign aid and political influence of the development assistance committee countries," MPRA Paper 39668, University Library of Munich, Germany.
    2. 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.
    3. 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, June.
    4. 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.
    5. Megersa, kelbesa & Cassimon, Danny, 2016. "Debt Sustainability and direction of trade: What does Africa’s shifting engagement with BRIC and OECD tells us?," MPRA Paper 76581, University Library of Munich, Germany.
    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. repec:unu:wpaper:wp2012-25 is not listed on IDEAS
    8. 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.
    9. Cassimon, Danny & Claessens, Stijn & Campenhout, Bjorn van, 2007. "Empirical Evidence on the New International Aid Architecture," Proceedings of the German Development Economics Conference, Göttingen 2007 2, Verein für Socialpolitik, Research Committee Development Economics.
    10. Gravier-Rymaszewska, Joanna, 2012. "How Aid Supply Responds to Economic Crises: A Panel VAR Approach," WIDER Working Paper Series 025, World Institute for Development Economic Research (UNU-WIDER).
    11. repec:nam:befdwp:3 is not listed on IDEAS
    12. Cassimon, Danny & Van Campenhout, Bjorn & Ferry, Marin & Raffinot, Marc, 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, Elsevier, vol. 144(C), pages 29-52.
    13. Ibrahim Mohammed Adamu, 2016. "Public Investment in Nigeria. Does External Debt Matter?," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 2(4), pages 120-138, December.
    14. Heylen, Fanny, 2010. "Analyzing the poverty impact of the enhanced Heavily Indebted Poor Countries (HIPC) initiative in Bolivia," Documentos de trabajo 1/2010, Instituto de Investigaciones Socio-Económicas (IISEC), Universidad Católica Boliviana.
    15. 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.
    16. 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.
    17. repec:dau:papers:123456789/10905 is not listed on IDEAS
    18. Danny Cassimon & Marin Ferry & Marc Raffinot & Bjorn Van Campenhout, 2017. "Dynamic Fiscal Impact of The Debt Relief Initiatives on African Highly Indebted Poor Countries (HIPCs)," Working Papers hal-01489613, HAL.
    19. 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, September.

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