Analytical Aspects of the Debt Problems of Heavily Indebted Poor Countries

48 Pages Posted: 20 Apr 2016

See all articles by Ravi Kanbur

Ravi Kanbur

Cornell University; Centre for Economic Policy Research (CEPR); IZA Institute of Labor Economics

Enrica Detragiache

International Monetary Fund (IMF) - European Department

Peter Wickham

International Monetary Fund (IMF)

Stijn Claessens

Bank for International Settlements (BIS)

Date Written: June 1996

Abstract

A group of heavily indebted low-income countries (HIPCs), most in Sub-Saharan Africa, has continued to experience external debt problems. Because the HIPCs' economic characteristics and external imbalances are very different from those of middle-income countries, the analysis of debt problems and debt-reduction must be modified and complemented in important ways. Therefore, the authors revisit the methodological issues underlying debt sustainability analysis, as well as theory and empirical evidence on how large debts affect economic performance. Their main question is: Should consideration be given to more upfront debt reduction for HIPCs, over and above that provided under current mechanisms, or should debts continue to be refinanced, subject to conditionality? Ongoing refinancing with conditionality reduces moral hazard and gives countries an incentive to maintain good policies. However, this approach entails transition costs, can create uncertainty, may lack credibility, and can impede local ownership of reform programs. Upfront debt reduction can create moral hazard problems and may weaken the incentives for maintaining sound policy. There are theoretical arguments about why a high level of debt can impede investment and policy reform. Although empirical evidence concerning the hypothesis that HIPCs suffer significant adverse effects from their large debt overhang is inconclusive, evidence from middle-income countries suggests that debt reduction can benefit an economy if the policy environment is right. Whether there should be further debt reduction for specific heavily indebted low-income countries depends on the facts for each case and requires quantitative analysis of data about different forces at play in the countries involved.

Suggested Citation

Kanbur, Ravi and Detragiache, Enrica and Wickham, Peter and Claessens, Stijn, Analytical Aspects of the Debt Problems of Heavily Indebted Poor Countries (June 1996). World Bank Policy Research Working Paper Series, Vol. , pp. -, 1999. Available at SSRN: https://ssrn.com/abstract=636121

Ravi Kanbur (Contact Author)

Cornell University ( email )

301-J Warren Hall
Ithaca, NY 14853
United States
607-255-7966 (Phone)
607-255-9984 (Fax)

HOME PAGE: http://www.kanbur.dyson.cornell.edu

Centre for Economic Policy Research (CEPR)

London
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Enrica Detragiache

International Monetary Fund (IMF) - European Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Peter Wickham

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Register to save articles to
your library

Register

Paper statistics

Downloads
179
Abstract Views
1,809
rank
167,939
PlumX Metrics