The Heavily Indebted Poor Countries and the Multilateral Debt Relief Initiative: a Test Case for the Validity of the Debt Overhang Hypothesis

Abstract

The Heavily Indebted Poor Countries Initiative (HIPCI) and the Multilateral Debt Relief Initiative (MDRI) were both implemented based on an assumption derived from the debt overhang hypothesis – that is, that the removal of excessive debt burdens would help to boost investment and economic growth. Using a quasi-experimental research design to compare the performance of investment and growth between LICs that have benefited from HIPCI and MDRI and those that have not, this study assesses whether the two programs have yielded the expected effects. The results indicate that while debt relief programmes have led to higher private-sector investment in beneficiary countries, they have not had any effect on public sector investment and growth. While the reasons for this outcome are not entirely clear, assumptions concerning the benefits that accrue to LICs as a result of debt relief appear to be in doubt.