The Poverty Effect of The Debt-Relief under (HIPC) Initiative: Assessing aggregate impact of the debt-relief On Poverty-reduction

Abstract: The main objective of this paper is to empirically assess debt-relief as a mechanism of aggregate poverty reduction in severely indebted and middle-income countries. The empirical analysis focuses on the channels connecting growth to investment and social spending that are believed to fuel the resource development gap of the heavily indebted countries that have suffered from the debt crisis. In order to do that I have constructed a model of the factors that determine the level of poverty in a country as well as the various variables that influence the change of the poverty conditions over time. For the cross-country regression analysis, the results are that the external debt stock has very little effect on the level of poverty when controlling for education, health, government consumption etc. Nonetheless, the GDP per capita impact on poverty reduction is very significant in the cross section of countries (-16, 87). Over time, poverty appears to be affected mainly by debt relief, although its effect on the coefficient is relatively small (0, 1909) when controlling for other factors such as growth in GDP per capita, which does not seem to affect poverty in the long- run. The implication of this result is that the theoretical ‘incentive mechanism’ may be lacking, meaning that the change in the incidence of poverty is affected directly through a government’s ability to provide public goods.