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organisations, has not only produced political statements but also some
policy measures. Along these lines, a debt relief for emerging economies in the current
situation may also be based on economic rather than on political rationality.
The history of debt relief is characterised by political failure and short-term thinking.
Consequently, so far debt relief did not deliver promising results. Neither the
economic performance nor the governance quality has increased. Analysing the
The political economy of debt relief 47
determinants of debt relief programs in the 1990s, we derive a standard result of
international political economy. Governments of creditor countries have granted
debt relief rather because of political than of economic reasoning. In particular, we
can confirm a path dependence with respect to debt relief granted.
However, the determinants of debt relief for highly indebted poor countries
have changed slightly, which indicates learning processes in creditor countries.
Thus, recent debt relief programs since 2000 seem to be positively influenced by
economic and institutional development as well as the results of the latest
research on the role of institutions for growth and development. This may indeed
be the result of a successful learning process of donor countries’ governments and
a slight change in the allocation pattern of debt relief along with the introduction
of some sensible criteria during the last decade. Analysing debt forgiveness within
the framework of the Enhanced HIPC initiative, one can find a relation between
debt relief and enhanced institutional quality. This is a very promising sign for the
As a consequence of the dramatic financial crisis the world has changed. The
global financial system will never be the same. Traditional instruments, certain
financial products and regulations will disappear. A new order is requested,
though yet to be developed. The determined reaction of the IMF and national governments
has undoubtedly helped securing the savings of many people and has
been necessary to prevent a collapse of the banking sector and whole economies.
However, the question remains if bailing out broke countries and banks will stabilise
the financial markets and fiscal policies in the future or rather set further
incentives for irresponsible lending, unsound policies and business practices.
Much depends on the application of the rule to tie debt relief to good governance
for helping the emerging countries.
48 The First Global Financial Crisis of the 21st Century Part II
10 November 2008
The Indian variant of the credit crunch is different. This column outlines potential
means of expanding India’s credit supply. Simply cutting interest rates will not
How can India be facing credit crunch if credit continues to grow at a torrid 30%?

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