The Impact of Aid and External Debt on Growth and Investment

What happens if HIPC debt relief resources are not additional? We seek to answer this question by quantifying the impact of debt service payments and aid flows in crosscountry growth and investment regressions. Based on the regressions we assess the likely impact of debt relief with and without changes in the aid flows. The result is that one-for-one changes in debt service payments and official aid flows leaves the growth rate unchanged, i.e., there seems to be no growth without additionality. When we use a measure of effective aid developed by the World Bank staff we find that if decreases in debt service payments are accompanied by falling grant levels, there may even be a negative impact on growth. Outline