Debt Relief Incentives in Highly Indebted Poor Countries (HIPC): An Empirical Assessment

By Fonchamnyo, Dobdinga C. | International Advances in Economic Research, August 2009 | Go to article overview

Debt Relief Incentives in Highly Indebted Poor Countries (HIPC): An Empirical Assessment


Fonchamnyo, Dobdinga C., International Advances in Economic Research


Abstract For more than two decades, the majority of countries in the African continent have experienced repeated episodes of rising external debt and debt service, which has led to numerous efforts of external debt relief. This paper provides new evidence on the effects of the Heavily Indebted Poor Countries (HIPC) Initiative on different economic and social indicators in 60 low income countries (LICs). Results show that LICs that were included in the HIPC Initiative marginally performed better than non-HIPC countries. There is evidence that countries that have reached the completion point of the HIPC Initiative by 2005 have experienced an average improvement in investment, health care, gross secondary education enrollment, and GDP per capita growth.

Keywords HIPC initiative * Debt relief incentive * Economic performance

JEL * F34 * H63 * O11

Introduction

For more than two decades, many developing countries have experienced repeated episodes of rising external debt and debt service burdens that have been accompanied by low investment and slower economic growth. The lack of economic progress experienced by the debt ridden developing countries has led to calls for measures to alleviate some of their debt burden. Advocates for debt cancellation have argued that most of the debt are odious (Adams 2004) and unjustified. Others considered the debt to be immoral, unethical and illegitimate (Tegucigalpa Declaration in 1999 at the Launching of Jubilee 2000).

The economic argument made for debt forgiveness is based on the Debt Overhang hypothesis. Debt overhang occurs if the stock of external debt in a country exceeds a country's repayment ability with some future probability, such that expected debt service increasingly depends on a country's output level. This means that some of the returns from investment are being used for debt service. Debt service is therefore considered as an implicit tax, thereby discouraging investment (Domar 1944; Krugman 1988; Sachs 1989), and stifling economic growth which makes it virtually impossible for highly indebted countries to escape poverty (Clements et al. 2005). Thus, it is believed that cancellation of external debts will encourage investment, economic growth and improve standard of living (Rajan and Subramanian 2005). This belief led to the adoption of the Heavily Indebted Poor Countries (HIPC) Initiative in 1996 which was subsequently enhanced in 1999 by the IMF and World Bank.

This paper aims at investigating the incentive effects of the HIPC Initiative on investment and economic growth of recipient countries. The paper is structured as follows: In "The HIPCs and Debt Relief Initiatives", a definition of HIPCs and a brief review of the history of debt relief initiatives are presented. "The HIPC Initiative: a Literature Review" summarizes the incentive framework of debt relief in a country that exhibits bad behavior. The data used in the study is discussed in the "Data" section. Empirical evidence of the effects of HIPC Initiative is reported in "Descriptive Statistics on the Effect of HIPC Initiative." The final section concludes.

The HIPCs and Debt Relief Initiatives

The HIPCs are a group of poor countries that were identified in the early 1990s as having excessive levels of external debt (for a listing of HIPCs see Table 7). These countries were jointly considered for debt relief under the HIPC Initiative which was instituted by the World Bank and IMF in 1996 and enhanced (1) in 1999. The HIPC Initiative is designed as an agreement among the major players in international finance with the objective of easing the debt burden of some of the world's poorest countries. It calls for the voluntary provision of debt relief by all creditors (multilateral, bilateral, or commercial debt) with the goal of providing a permanent exit from repeated debt rescheduling (Gunter 2003) and for long term debt sustainability (Arnone et al. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Debt Relief Incentives in Highly Indebted Poor Countries (HIPC): An Empirical Assessment
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.