The Aftermath of Sovereign Debt Assistance: Does Debt Relief Play a Role in Reducing Future Conflict?

Abstract

One major obstacle that restrains developing countries from economic growth is debt. Financial burdens due to debt tie up resources that could potentially be used for education, healthcare and other societal improvements. To assist countries that demonstrate large amounts of debt, a group of creditors implemented initiatives with the purpose of assisting developing countries financially through partial or complete debt relief. The question, however, remains as to what extent debt relief assists in reducing future conflict. This paper analyzes this subject in the context of the 36 countries that participated in the 1999 Enhanced Heavily Indebted Poor Countries (HIPC) Initiative, where conflict is measured as battle-related number of deaths caused by a civil war. The regression model contains explanatory variables such as the economic growth (measured as real GDP per capita), the importance of debt relief (in terms of debt relief-to-GDP and debt relief-to-exports) and the duration of the initiative. The results show a negative relationship between debt relief and conflict, but it is not statistically significant. A graphical approach agrees with that finding. Debt relief is a debatable concept that has consequences depending on the scope of the analysis. In my case, the consequence of debt relief on future conflicts cannot be established with statistical significance. The study therefore concludes that even though debt relief may be a great economic advantage to developing countries, there is only weak evidence that it has a bearing on the determination of future conflict.