In for a Penny, In for a 100 Billion Pounds: Quantifying the Welfare Benefits from Debt Relief

Since 1989, creditor countries have provided debt relief to developing countries worth more than 100 billion US dollars. Prominent lobby groups are campaigning for a further 400 billion US dollars in debt relief to be provided in the near future. How much could developing country’s gain from debt relief? How costly is it to provide debt relief? Would debt relief increase social welfare? And if so, to which countries should it be most urgently directed? In this paper, we develop a framework for measuring the marginal welfare gain from debt relief and indicate when this marginal measure can be used to estimate the total welfare benefit of debt relief. We then apply this framework to data on the debts of 72 developing countries to form an estimate of the global social welfare benefits of debt forgiveness.