The Limitations of Debt Relief. A critical study of the theoretical and empirical support for debt relief as a development assistance instrument

Abstract: From the early 1990s and onwards the use of debt relief as a method of providing development assistance has become increasingly popular, especially since the launch of the HIPC initiative in 1996. This thesis aims to investigate the general theoretical and empirical support of the growth enhancing properties of debt relief with regard to low income countries. Focus is put on evaluating the harmful affect of national external debt and, more specifically, on the debt overhang hypothesis. The extent to which debt relief is given in addition to existing and normal levels of foreign aid (additionality) is also studied. It is concluded that the size of the external debt stock does not appear to be a significant determinant of relevant macroeconomic variables – inflation, real interest, domestic savings, and private, public and foreign investments – suggesting that the importance put on the size of the external debt stock might be overstated.