growth rates, albeit significantly below pre-crisis projected growth averages (IMF, 2009a).<sup>5</sup> These potential benefits of debt relief for borrowing countries (in terms of economic growth) suggest that most highly indebted poor countries within the region might indeed have been located on the wrong side of the debt Laffer curve, meaning that higher debt has been hurting economic growth.

However, in addition to the exposure to external shocks, post-HIPC growth rates have also suffered from excess growth volatility, reflecting the rather anemic nature of the growth process. The observed volatility is likely to affect long-run growth and, more generally, prospects for meeting the first millennium development goals of halving poverty by 2015 in the region. At the same time, external debt figures have shown a renewed increasing trend in a number of countries, with a rapid deterioration of HIPCs’ debt-threshold indicators (World Bank, 2006). This trend has raised concerns about the risks of another sovereign debt crisis in the post-HIPC across the region.

This paper fills an important gap in the literature by proposing a quantitative macroeconomic model that captures the links between growth, foreign aid, and external debt in the post-HIPC era. The structural model allows one to better understand the various channels through which foreign aid and external debt may impact growth. One of the main features of the model is the production function that incorporates the effects of public capital, and the productivity of private capital and labor on output. Also significant is the adjustment of the balance of payment equation to account for excessive reliance on external resources to bridge financing gaps.

The objective of this paper is to quantify the HIPC dividends across Sub-Saharan Africa and assess the potential risks associated with the renewed deterioration of external debt. The first part of the paper analyzes the dynamics of growth in the post-HIPC era. The second part draws on a standard macroeconomic model that accounts for financing of deficits and debt structure in the post-HIPC to assess long-run growth. The model is applied to Ethiopia. The baseline simulation of the model produces slow growth and accumulating external debt if current economic conditions continue as they are. Baseline projections are constructed, after which some experiments are run to explore the growth implications of higher foreign aid and/or lower interest payments on foreign debt, under different scenarios. The simulation results show that the optimal outcome in terms of higher economic growth depends on the sustainability and size of foreign aid and the proportion of external assistance allocated to public investments.

This research is undertaken at a time of the global review of progress toward the MDGs, almost a decade into the adoption of these goals (Go et al., 2010; Bhagwati, 2010).<sup>6</sup> It is motivated by the wave of euphoria that has accompanied the resurgence of growth in the post-HIPC across Sub-Saharan Africa. In effect, global experts not only in development institutions, but also in academia have gone as far as likening Africa’s recent positive growth rates to those that have transformed Asian emerging market economies into global players (Sala-i-Martin and Pinkovskiy, 2010; Devarajan and Shetty, 2010).

Although the success of Asian emerging market economies, most notably illustrated by large current account surpluses, has been predicated on major structural shifts in production possibility frontiers and industrial transformation, most African countries remain excessively dependent on natural resources and primary commodity exports (Fofack, 2010)]. Hence, the paper also attempts to shed some light on the nature and

> 5 According to IMF’s estimates published in the World Economic Outlook Database, growth rates averaged 2.47% across Sub-Saharan Africa in 2009, significantly below the rates enjoyed in the pre-crisis years (about 5.5%) between 2004 and 2008.

> 6 On the occasion of that tenth anniversary of the millennium declaration, the latest issue of IMF’s Finance & Development— _Restoring Hope: Reinvigorating the Millennium Development Goals_ —is entirely devoted to the MDGs (for further details, see IMF, 2010).

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