To Give or to Forgive? Aid versus Debt Relief

To Give or to Forgive? Aid versus Debt Relief

Is generalized debt relief an effective development strategy, or should assistance be tailored to countries' characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthines...

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Bibliographic Details
Main Authors:	Cordella, Tito, Missale, Alessandro
Format:	Policy Research Working Paper
Language:	English
Published:	2012
Subjects:	ABSORPTIVE CAPACITY ACCOUNTING ALLOCATION OF CREDIT AMOUNT OF CREDIT AMOUNT OF DEBT AMOUNT OF LOANS ARREARS ASYMMETRIC INFORMATION AVERAGE DEBT BANK CREDIT BANK FOR INTERNATIONAL SETTLEMENTS BANK POLICY BOND MARKETS BOND YIELD BONDS BORROWING CAPACITY BORROWING COSTS CAPITAL MARKET CAPITAL MARKETS CASE OF DEFAULT CLAIM COMMERCIAL BANKS COMMERCIAL DEBT COST OF DEBT CREDIT CONSTRAINT CREDIT HISTORY CREDITOR CREDITORS CREDITWORTHINESS CREDITWORTHY BORROWER CURRENCY CURRENT COSTS DEBT DEBT CRISIS DEBT FORGIVENESS DEBT LEVELS DEBT OBLIGATIONS DEBT OVERHANG DEBT RATIOS DEBT REDUCTION DEBT RELIEF DEBT RELIEF INITIATIVE DEBT RELIEF INITIATIVES DEBT SERVICE DEBT SERVICE PAYMENTS DEBT SUSTAINABILITY DEBT-RELIEF DEBTOR DEBTOR COUNTRIES DEBTOR GOVERNMENT DEBTORS DEBTS DEFAULT COSTS DEFAULT RISK DEFAULTERS DEFAULTS DEMAND FOR CREDIT DEVELOPING COUNTRIES DEVELOPING COUNTRY DEVELOPMENT ASSISTANCE DISBURSEMENTS DISCOUNT RATES DOLLAR BONDS DOMESTIC DEBT ECONOMIC ACTIVITY EQUALITY EUROBOND EXPENDITURE EXTERNAL DEBT EXTERNAL RESOURCES FINANCIAL MARKETS FOREIGN AID FOREIGN CAPITAL FOREIGN CLAIMS FOREIGN CURRENCIES FOREIGN INVESTMENT FOREIGN INVESTORS FUNGIBLE FUTURE DEBT GLOBAL BOND GLOBAL DEVELOPMENT FINANCE HIGH DEBTS HIGH INTEREST RATES HIGHLY INDEBTED COUNTRIES IMPACT OF DEBT INDEBTED INDEBTED COUNTRIES INDEBTED COUNTRY INDEBTED POOR COUNTRIES INDEBTEDNESS INSTITUTIONAL REFORM INTEREST RATE INTEREST RATES INTERNATIONAL BANK INTERNATIONAL CAPITAL INTERNATIONAL CAPITAL MARKETS INTERNATIONAL FINANCE INTERNATIONAL LENDING INTERNATIONAL SETTLEMENT INTERNATIONAL SETTLEMENTS INVESTING INVESTMENT CHOICES INVESTMENT DECISION INVESTMENT DECISIONS INVESTMENT OPPORTUNITIES INVESTMENT PROJECTS LACK OF CAPITAL LENDERS LOAN LOAN VOLUMES LONDON CLUB LONG-TERM BORROWING LONG-TERM LOANS MARKET ACCESS MARKET VALUE MATURITY MONETARY FUND MORAL HAZARD MULTILATERAL DEBT MULTILATERAL DEBT RELIEF MULTINATIONAL NEW CREDIT OLD CREDITORS OLD DEBT OUTPUT LOSS OUTSTANDING DEBT PAST DEBT POLITICAL ECONOMY POOL OF BORROWERS PRESENT VALUE PRESENT VALUE OF DEBT PRIVATE BORROWING PRIVATE CAPITAL PRIVATE CAPITAL INFLOWS PRIVATE CREDIT PRIVATE CREDITORS PRIVATE DEBT PRIVATE FUNDS PRIVATE LENDERS PRIVATE LENDING PRIVATE LOANS PRODUCTIVE INVESTMENT PUBLIC CREDIT PUBLIC FINANCE PUBLIC INVESTMENT RECIPIENT COUNTRIES RECIPIENT COUNTRY RECOVERY RATE REMAINING DEBT RENEGOTIATION REPAYMENT RETURN RETURN ON INVESTMENT RETURNS RISK NEUTRAL RISK-FREE RATE SAVINGS SERIAL DEFAULTERS STOCK OF DEBT SUBSIDIARIES THIRD WORLD DEBT TREASURIES TREASURY TREASURY BILLS VALUE OF DEBT YIELD SPREAD YIELD SPREADS
Online Access:	http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20111026084243 http://hdl.handle.net/10986/3625

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Summary:	Is generalized debt relief an effective development strategy, or should assistance be tailored to countries' characteristics? To answer this question, the authors build a simple model in which recipient governments reveal their creditworthiness if donors offer them to choose between aid and debt relief. Since offering such a menu is costly, it is preferred by donors only when the cost of assistance is low, and the probability that an indebted country is creditworthy is high enough. For lower probabilities and higher costs of assistance, donors prefer a policy of only debt relief. Very limited aid is the preferred policy only for high costs of assistance, and low probabilities that the government is creditworthy.

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