9 Debt Relief in Low‐Income Countries: Background, Evolution, and Effects

Abstract

AbstractThe conventional modalities for providing financial assistance to low-income countries have been foreign aid and debt relief. Although some attention has been paid to establishing new methods of development financing, recent global initiatives have concentrated instead on the traditional ones. This chapter focuses on debt relief. It describes how debt relief to indebted poor countries has evolved from early attempts to relax the ‘terms’ applied to poor country debt, to the heavily indebted poor country (HIPC) initiative and its enhancement and, more recently, to the multilateral debt relief initiative first proposed in June 2005 at the G8 summit. It gives some calculations of the size of the relief provided. It also discusses and estimates the extent to which debt relief has been ‘additional’. In this context, it examines the relationship between debt relief and foreign aid; has it been positive or negative? The empirical part of the chapter focuses on the low-income countries of Sub Saharan Africa and shows that the effects of debt relief on aid flows and resource transfers have changed over time. The chapter conjectures as to why these changes may have occurred, and discusses some of the more important contemporary policy issues surrounding debt relief.