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To give or to forgive ? aid versus debt relief

  • Cordella, Tito
  • Missaley, Alessandro

Is generalized debt relief an effective development strategy, or should assistance be tailored to countries'characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5859.

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Date of creation: 01 Oct 2011
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Handle: RePEc:wbk:wbrwps:5859
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  2. 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 and Management (IOB).
  3. Catherine Pattillo & Hélène Poirson & Luca Antonio Ricci, 2011. "External Debt and Growth," Review of Economics and Institutions, Università di Perugia, vol. 2(3).
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  11. Giovanni Dell'Ariccia & Tito Cordella, 2002. "Limits of Conditionality in Poverty Reduction Programs," IMF Working Papers 02/115, International Monetary Fund.
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  13. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
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  15. Krugman, Paul, 1988. "Financing vs. forgiving a debt overhang," Journal of Development Economics, Elsevier, vol. 29(3), pages 253-268, November.
  16. Tito Cordella & Giovanni Dell'Ariccia, 2007. "Budget Support Versus Project Aid: A Theoretical Appraisal," Economic Journal, Royal Economic Society, vol. 117(523), pages 1260-1279, October.
  17. Nicolas Depetris Chauvin & Aart Kraay, 2005. "What Has 100 Billion Dollars Worth of Debt Relief Done for Low- Income Countries?," International Finance 0510001, EconWPA.
  18. Michaelowa, Katharina, 2003. " The Political Economy of the Enhanced HIPC-Initiative," Public Choice, Springer, vol. 114(3-4), pages 461-76, March.
  19. Serkan Arslanalp & Peter Blair Henry, 2006. "Policy Watch: Debt Relief," Journal of Economic Perspectives, American Economic Association, vol. 20(1), pages 207-220, Winter.
  20. Johansson, Pernilla, 2010. "Debt Relief, Investment and Growth," World Development, Elsevier, vol. 38(9), pages 1204-1216, September.
  21. Corinne Del�chat & Gustavo Ramirez & Smita Wagh & John Wakeman-Linn, 2010. "How Global Financial Markets Affect Sub-Saharan Africa," IMF Staff Papers, Palgrave Macmillan, vol. 57(1), pages 172-208, April.
  22. Azam, Jean-Paul & Laffont, Jean-Jacques, 2003. "Contracting for aid," Journal of Development Economics, Elsevier, vol. 70(1), pages 25-58, February.
  23. Andrea PRESBITERO, 2005. "The Debt-Growth Nexus: a Dynamic Panel Data Estimation," Working Papers 243, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
  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.
  25. 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.
  26. Jeremy Bulow, 2002. "First World Governments and Third World Debt: A Bankruptcy Court for Sovereign Lending?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(1), pages 229-256.
  27. 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.
  28. Helmut Reisen & Sokhna Ndoye, 2008. "Prudent versus Imprudent Lending to Africa: From debt relief to emerging lenders," OECD Development Centre Working Papers 268, OECD Publishing.
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