Cambridge Journal of Economics 2013, 1 of 15 doi:10.1093/cje/bet039 © The Author 2013. Published by Oxford University Press on behalf of the Cambridge Political Economy Society. All rights reserved. On the sustainability of external debt: is debt relief enough? Gianni Vaggi* and Annalisa Prizzon** Elaborating on Pasinetti (1998), the ‘geometry of debt sustainability’ (GDS) represents an analytical tool for the analysis of the long term sustainability of foreign debt. The paper focuses on debt sustainability in low-income countries, which face several major challenges simultaneously: achieving economic growth, consolidating human devel- opment goals and meeting regular debt service payments. The GDS reveals how the ‘structural’ aspect of debt sustainability—as indicated by trends in the non-interest cur- rent account—is closely interlinked with sustainability from a ‘inancial’ point of view— as indicated by the relationship between the growth and the interest rate. The GDS shows why both debt cancellation and additional aid are necessary to give indebted low-income economies a chance to improve their long term economic viability. Key words: Debt relief, External debt sustainability, Development inance, Aid JEL classiications: E60, H60, O11 1. Introduction Since the end of the 1980s, heavily indebted low-income countries (LICs) have been ben- eiting from debt relief measures that range from the rescheduling of interest payments to partial or total debt stock forgiveness. Among the most well-known measures are the Heavily Indebted Poor Countries (HIPC) Initiative of 1996 (enhanced in 1999) and the Multilateral Debt Relief Initiative (MDRI) 1 of 2005. Notwithstanding these initiatives and the overall inancial improvements that they have contributed to bringing about, many countries still face daunting challenges: they must service foreign debt every year, while at the same time they are supposed to achieve the Millennium Development Goals (MDGs). Moreover, it is not yet clear whether the debt story of the 1980s and 1990s is inally over or whether some countries are still at risk of falling again into a debt trap. The inancial crisis that originated in 2007 has exacerbated the situation; recession and reduced aid in some Manuscript received 6 July 2009; inal version received 6 May 2013. Address for correspondence: Gianni Vaggi Department of Economics and Management, University of Pavia, via S. Felice 5, 27100 Pavia, Italy; email: Gianni.vaggi@unipv.it * Department of Economics and Management, University of Pavia, via S. Felice 7, 27100 Pavia, gianni. vaggi@unipv.it ** Overseas Development Institute, 203 Blackfriars Road, London SE1 8NJ a.prizzon@odi.org.uk. The authors are grateful to Amit Bhaduri, Amitava Dutt, Andrew Mold, to three referees and to the editors for their constructive comments. The authors alone are responsible for any remaining errors. The views expressed herein are solely those of the authors and do not necessarily represent the views of the ODI. 1 On HIPC Initiative and MDRI see IDA and IMF (1999) and IDA (2005), respectively. Cambridge Journal of Economics Advance Access published December 4, 2013 by guest on December 9, 2013 http://cje.oxfordjournals.org/ Downloaded from