debt relief, institutions and growth in poor...
TRANSCRIPT
Debt Relief, Institutions and Growth in Poor Countries
Andrea F. PresbiteroE–mail: [email protected]
Homepage: www.dea.unian.it/presbitero/
1Universita Politecnica delle Marche
2Money and Finance Research group (MoFiR)
IMF – Research Department — Washington DC, March 27, 2009
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 1 / 32
Book project
Introduction
The presentation deals with external (and domestic) debt in poor countries.
It is based on two chapters of the book “Debt Relief Initiatives: PolicyDesign and Outcomes” (Arnone and Presbitero), forthcoming in theAshgate’s Global Finance series in 2009.
The book is an ex-post evaluation of the HIPC Initiative aimed at drawinguseful suggestions for debt reduction programs.
We recognize the great efforts made by the World Bank and the IMF andthe importance of the results achieved. However, we stress:
1 the potential sources of future distress, related to a rising domesticdebt in many HIPCs,
2 the critical role of institutions in shaping debt relief effectiveness(country specific approach),
3 the monitoring of the progresses in poverty reduction and economicgrowth (it is probably to soon to draw conclusions)
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Book project
The book: “Debt Relief Initiatives: Policy Design and Outcomes”
1 The Building Blocks
The IMF-WB HIPC Initiative: Description and IssuesExternal Debt Sustainability: Theory and Approaches
2 HIPC/LIC and Macroeconomic Management
Money and Interest Rates: The Missing Link of Fiscal AdjustmentDomestic Debt in Developing Countries and in HIPCsDomestic Debt and Debt Sustainability
3 Macroeconomic Performance, Poverty and Social Indicators
External Debt and Growth: Mixed EvidenceAn Empirical ApplicationAn Ex-post Evaluation of Debt Relief
4 From HIPCs to the Least Income Countries Initiative and beyond.
A Comprehensive Approach to Debt SustainabilityThe Role of Institutions: Governance ConditionalityCoordination Issues, Responsible Lending and Vulture FundsSuggestions for Debt Relief Programs
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Book project
1 Book project
2 The Debt-Growth Nexus in Poor Countries: A ReassessmentAim and related literatureData and MethodologyResultsConclusions
3 Debt Relief Effectiveness and Institution BuildingAim and related literatureThe determinants of debt reliefThe outcomesConclusions
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The Debt-Growth Nexus in Poor Countries: A Reassessment Aim and related literature
Aim and motivations
The large costs of debt relief programs require sound evidence on the growtheffect of debt reduction.
Recent research raised some concerns on high debt being a real constraint toeconomic growth and social expenditures in poor countries.
The paper directly investigates the role played by institutions and policies inthe debt-growth nexus, building on the hypothesis that this relationshipcould differ according to countries’ specific characteristics (Cordella et al2005).
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 5 / 32
The Debt-Growth Nexus in Poor Countries: A Reassessment Aim and related literature
Theoretical underpinnings
The rationale for a negative correlation between external debt and economicgrowth is related to:
1 debt overhang (Krugman 1988; Sachs 1989; Koeda 2008 explicitly forLICs), even if:
net positive resource transfers reduce the disincentive effect ofdebt (Bird and Milne 2003) andweak economic institutions and infrastructure represent the majorhindrance to investment in HIPCs (Arslanalp and Henry 2006)
2 macroeconomic uncertainty which generates a misallocation ofresources (short-termism and “waiting” option) and reduce theefficiency and productivity of capital.
3 disincentive on investments in human capital and on the government’swillingness to adopt structural reforms (Sachs 2002, Vamvakidis 2007).
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The Debt-Growth Nexus in Poor Countries: A Reassessment Aim and related literature
Empirical evidence
The evidence on debt overhang (Elbadawi et al 1997; Pattillo et al 2002,2004; Clements et al 2003) lacks robustness (Moss and Chiang 2003;Chauvin and Kraay 2005): the main issue to deal with is the direction ofcausality (Easterly 2001 and Lane 2004).
Debt irrelevance above a certain (country-specific) debt threshold(Cordella et al 2005).
The negative relationship between debt and growth could be driven byomitted time invariant country characteristics (Imbs and Ranciere 2008).
The paper controls for a time variant institutional indicator, interacting itwith debt indicators in order to find out a possible source of heterogeneity.
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The Debt-Growth Nexus in Poor Countries: A Reassessment Data and Methodology
The dataset
The dataset covers 114 low- and middle-income countries over the period1980–2004. The main sources are the WDI, the GDF and the WEO.
External debt is measured in net present value terms (Dikhanov 2004) as aratio over GDP or exports (denominators are filtered to reduce reversecausality (Easterly 2001; Cordella et al 2005)).
The quality of policies and institutions is measured by the Country Policyand Institutional Assessments (CPIA) indicator (results comparable to theWorld Bank-IMF DSF country-specific debt burden thresholds).
Data are averaged over non-overlapping five years periods.
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The Debt-Growth Nexus in Poor Countries: A Reassessment Data and Methodology
Methodology
The dynamic growth model is estimated with the two-step System-GMMadopting the Windmeijer’s (2005) finite-sample correction:
GROWTHi,t = αGDPi,t−1 + Xi,tβ′ + δ1DEBTi,t + δ2DEBT 2
i,t + ηi + τt + εi,t
where DEBT is alternatively the ratio of the NPV of external debt over(filtered) GDP or exports, X is a vector of controls including investment,population growth, schooling, openness, the variability of inflation, andterms of trade; ηi are country-specific time invariant effects (six regionaldummies); τt are times fixed effects.
This basic setup is augmented including:
1 the institutional indicator (CPIA, continuous or categorical),2 interacting the debt indicators with the institutional one.
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The Debt-Growth Nexus in Poor Countries: A Reassessment Results
External Debt, GDP Growth and Level, by Institutional Quality
Institutions NPV Real pc Real Aid/GDP Obs.(CPIA index) Debt/GDP GDP growth GDP pc
Weak 62.80 -0.04 959 10.30 120Medium 49.23 1.77 1,222 10.75 125Strong 35.47 2.83 2,347 4.67 133
Whole sample 48.70 1.57 1,534 8.48 378
Institutions matter
the negative correlation between external debt and economic growth could bedriven by the role played by institutions and policies, which are associated with alower external debt and higher growth rates.
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The Debt-Growth Nexus in Poor Countries: A Reassessment Results
NPV of PPG External Debt over GDP, Two-Step System–GMM
Dep. Var.: GROWTH (1) (2) (3) (4) (5) (6)
(DEBT/GDP) 2.415** 1.583 1.931* -0.027 0.035 4.605**[1.232] [1.659] [1.098] [0.465] [0.470] [2.099]
(DEBT/GDP)2 -0.487*** -0.310 -0.664**[0.170] [0.222] [0.276]
CPIA 1.112*** 3.630***[0.315] [1.164]
(DEBT/GDP) × CPIA -0.690**[0.306]
Good CPIA (0,1) 7.613*** 16.493***[2.011] [5.889]
(DEBT/GDP) × Good CPIA -1.649*** -7.002**[0.537] [3.234]
(DEBT/GDP)2 × Good CPIA 0.760*[0.430]
Omitted categories: Weak CPIA and (DEBT/GDP) × Weak CPIA
Medium CPIA (0,1) 5.484***[1.996]
Strong CPIA (0,1) 8.031***[2.217]
(DEBT/GDP) × Medium CPIA -1.189**[0.505]
(DEBT/GDP) × Strong CPIA -1.616***[0.574]
Observations 378 378 378 378 378 378Number of countries 110 110 110 110 110 110
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The Debt-Growth Nexus in Poor Countries: A Reassessment Results
Results
The debt-growth relationship follows a debt Laffer curve (col 1), whosemaximum is in correspondence of a ratio of NPV of external debt over GDPequals to 11 (very similar to the ones estimated by Pattillo et al (2002) andCordella et al (2005)).
The inclusion of the CPIA index (col 2) makes the relationship between debtand growth no more significant.
The marginal impact of external debt to economic growth is positive whenthe CPIA index is low and turns negative for larger values (col 3).
Large debts impinge on economic growth in countries with medium andstrong policies (col 5).
Institutions matter for the debt-growth nexus
The debt Laffer curve looses significance when policies are taken into account,suggesting that institutional quality could be a common determinant of both lowgrowth and high debt.
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The Debt-Growth Nexus in Poor Countries: A Reassessment Results
The Debt-Growth Nexus and Institutional Quality
2
3
4
5
6
2
3
4
5
6
−10 −5 0 5 10 −10 −5 0 5 10
Weak institutions Medium institutions
Strong institutions Total
ln(NPV ExDebt/GDP) Linear fit
ln(N
PV
ExD
ebt/G
DP
)
Real per capita GDP growth rate (unexplained part)
Graphs by Institutional quality
Notes: Different panels refer to countries with weak (CPIA ≤ 3.25), medium (3.25 < CPIA < 3.75) and strong
(CPIA ≥ 3.75) policies and institutions, and to the overall sample.
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The Debt-Growth Nexus in Poor Countries: A Reassessment Results
The economic impact of debt on growth
A reduction in the ratio of the NPV of external debt over GDP from 60 to20 per cent is associated with an increase in the GDP growth rate of 1.06(1.42) in countries with medium (strong) institutions.
The effect is almost nil and statistically not significant in countries with aweak institutional framework.
In those countries, economic growth is likely to be constrained by otherfactors, and positive net resource transfers (aid flows as a share of GDP aremore than twice larger than in countries with strong institutions) could helpreduce the crowding out of public investment (Cordella et al 2005).
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The Debt-Growth Nexus in Poor Countries: A Reassessment Results
Robustness
Partial correlation between debt and growth depends on the choice betweencontemporaneous, initial or lagged debt ratios (Depetris Chauvin and Kraay2005).
Reverse causality is addressed taking lagged debt ratios instead ofcontemporaneous ones and results are broadly consistent.
Results are generally robust to:
1 nominal external debt (scaled by GDP or exports).2 a reduction in the number of instruments (Roodman 2007).3 changes in the set of control variables, including M2, secondary
education, income classification, a dummy for HIPCs, and the ratios oftotal debt service and official aid over GDP.
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 15 / 32
The Debt-Growth Nexus in Poor Countries: A Reassessment Results
NPV of PPG External Debt over Exports, Two-Step System–GMM
Dep. Var.: GROWTH (1) (2) (3) (4) (5) (6)
(DEBT/EXP) 1.719 2.089 1.192 0.173 0.730 4.033**[1.173] [2.364] [1.368] [0.446] [0.499] [2.039]
(DEBT/EXP)2 -0.219* -0.209 -0.377**[0.123] [0.229] [0.191]
CPIA 1.368*** 3.371*[0.364] [1.939]
(DEBT/EXP) × CPIA -0.384[0.360]
Good CPIA (0,1) 7.179** 16.427***[3.070] [6.180]
(DEBT/EXP) × Good CPIA -1.135** -5.039**[0.556] [2.256]
(DEBT/EXP)2 × Good CPIA 0.397*[0.211]
Omitted categories: Weak CPIA and (DEBT/EXP) × Weak CPIA
Medium CPIA (0,1) 11.474***[2.328]
Strong CPIA (0,1) 10.581***[3.070]
(DEBT/EXP) × Medium CPIA -2.013***[0.449]
(DEBT/EXP) × Strong CPIA -1.628***[0.590]
Observations 390 390 390 390 390 390Number of countries 114 114 114 114 114 114
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The Debt-Growth Nexus in Poor Countries: A Reassessment Conclusions
Main result and its policy implications
Institutions matter. Debt relief is likely to be effective only in countrieswith sound institutions (Dessy and Vencatachellum 2007; Harrabi et al2007).
Debt relief policies should avoid one-size-fits-all programs and be tailored tocountry-specific characteristics, as already done in the DSF.
Debt cancelation conditional upon an actual improvements in institutionalquality (governance conditionality) could act as a strong incentive forrecipients to strengthen institutions and policies (Collier 2007).
This analysis has many limitations and has to be complemented with thedirect assessment of debt relief effectiveness.
Finally, debt relief could be motivated by other considerations (i.e. odiousdebt, a signalling–endorsement effect).
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Debt Relief Effectiveness and Institution Building Aim and related literature
Aim of the paper
$100 billion in debt relief granted by donors to LIC between 1989 and 2003had a very limited effect on public spending, investment and growth(Depetris Chauvin and Kraay 2005).
This paper moves from the conclusion of the previous one and aims at:
1 identify the determinants of debt relief,2 directly assessing the effectiveness of debt relief on different
macroeconomic outcomes.
The focus in on institutions and policies to evaluate whether donors arerewarding institution building and to what extent debt relief is associatedwith subsequent improvements in the institutional framework.
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Debt Relief Effectiveness and Institution Building Aim and related literature
The rationale for debt relief
Debt overhang and crowding out are two arguments in favor of debt relief(but the empirical evidence is inconclusive (Rajan 2005)).
However, debt relief could not necessarily trigger growth and developmentbecause:
1 debt relief curse: aid dependence could undermine institutional quality(Knack 2001; Moss et al 2006; and, in contrast, Kanbur 2000),
2 debt relief has a minimal impact on HIPCs’ net resource transfers(Arslanalp and Henry 2006),
3 large external debt might be a signal of a high (and stable over time)discount rate against the future (Easterly 2002).
Multilateral debt relief could partially overcome these problems and debtrelief would become more effective with time (learning by doing).
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Debt Relief Effectiveness and Institution Building The determinants of debt relief
Model and data
Debt relief consists in (1) the selection of eligible countries and (2) thechoice of the amount of debt reduction (Freytag and Pehnelt 2009).
The determinants of debt relief are estimated using a two-step model a laHeckman where:
1 in the selection equation, the probability of receiving debt relief isfunction of the past debt relief, aid inflows, real GDP per capita, debtservice, the NPV of external debt, CPIA, a dummy for HIPCs, and thestatus of former colony;
2 in the outcome equation the amount of debt relief is function of pastlevels of aid, total debt service, external debt and CPIA.
The dataset covers 62 developing countries over the period 1988-2007 andmerges WDI data with other datasets on debt relief (Depetris Chauvin andKraay 2005), external (Dikhanov 2004) and domestic debt (Abbas 2007),and institutions (CPIA, WGI).
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Debt Relief Effectiveness and Institution Building The determinants of debt relief
Determinants of Debt Relief, Whole Sample
1992-2003 1992-1995 1996-1999 2000-2003
Outcome equation: Dep. Var.: DEBT RELIEFt
CPIAt−1 0.459*** 0.022 0.472* 0.878***AIDt−1 -0.531** -0.350 -0.792** -0.065DEBT SERVICEt−1 -0.448*** 0.033 -0.046 -1.084***EXTERNAL DEBTt−1 0.629*** -0.000 0.761*** 1.032***
Selection equation: Dep. Var.: Pr(DEBT RELIEFt) > 0
HIPC(0, 1) 1.152*** 1.289* 1.044 0.905COLONY -0.000 -0.009 -0.000 0.009ln(DEBT RELIEFt−1) 0.534*** 0.779*** 0.617*** 0.482**CPIAt−1 0.144 -0.298 0.146 1.106**AIDt−1 -0.044 0.264 -0.288 0.486DEBT SERVICEt−1 0.067 -0.081 0.084 0.458GDPt−1 0.169 0.004 0.614 -0.680EXTERNAL DEBTt−1 0.267 0.322 0.192 0.480
λ 0.152 -0.124 0.727*** 0.156Observations 161 50 53 58Censored 76 24 25 27
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Debt Relief Effectiveness and Institution Building The determinants of debt relief
Results
1 Debt relief is path dependent (Michaelowa 2003).
2 Donors grant debt relief to countries which are most in need and with lowrepayment capacity.
3 In correspondence of the HIPC Initiative, donors changed behavior, choosingthe eligible countries and the amount of debt relief on the basis of the qualityof policies and institutions, rewarding the countries with better governance
4 The increased influence of the IMF and the World Bank is partially divertingdonors’ decisions from political considerations (Dollar and Levin 2006).
5 Results are similar for the sub-sample of HIPCs and hold even using the WGI.
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Debt Relief Effectiveness and Institution Building The outcomes
Debt relief delivered: an assessment
Given its cost, debt relief deserves a careful scrutiny about its effectiveness.
On aggregate, the HIPC Initiative and the MDRI have been successful inrelaxing the budget balance and increasing poverty reduction expenditures.
However, the situation at country level is heterogeneous, with countries thatstill face harsh financing constraints and have limited poverty-reducingexpenditures.
More resources and poverty reduction expenditures are not necessarilycorrelated with improvements in the welfare of the poor (Gomanee et al2005; Weiss 2008) and HIPCs are still far away from the achievements of theMDGs (Unctad 2006)
Expectations should be realistic: Tanzania, Ghana and Uganda need around15% of GDP in external financing to fund the MDGs (Sachs et al 2004),while debt relief counts for less than 3%.
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 23 / 32
Debt Relief Effectiveness and Institution Building The outcomes
Debt Service and Poverty Reduction Expenditures in selected HIPCs
0510
Tanzania
Uganda
Cameroon
Madagascar
Rwanda
Ethiopia
Malawi
Mozambique
Niger
Benin
Mauritania
Zambia
Burundi
Burkina Faso
Congo, Dem. Rep.
Haiti
Sierra Leone
Senegal
Chad
Ghana
Honduras
Mali
Nicaragua
Guyana
Sao Tome and Principe
Bolivia
Guinea
Gambia
Guinea Bissau
Congo, Rep.
Debt service (% GDP)
Decision Point
2007
0 5 10 15 20
Haiti
Sierra Leone
Congo, Dem. Rep.
Guinea
Benin
Guinea Bissau
Uganda
Burkina Faso
Gambia
Cameroon
Honduras
Congo, Rep.
Mali
Mauritania
Niger
Senegal
Ghana
Zambia
Burundi
Sao Tome and Principe
Madagascar
Malawi
Chad
Rwanda
Nicaragua
Ethiopia
Bolivia
Tanzania
Mozambique
Guyana
Poverty reduction expenditures (% GDP)
Decision Point
2007
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Debt Relief Effectiveness and Institution Building The outcomes
Previous studies
In general, results are rather disappointing: there is weak evidencesupporting a positive impact on public and social spending, investment andgrowth rates (Depetris Chauvin and Kraay 2005; Johansson 2008; Cuaresmaand Vincelette 2008).
Focusing on Africa and considering the role of institutions provide betterresults: in countries with good (or improving) institutional quality, debtreduction is associated with an increase in the the share of country’sexpenditures allocated either to public education or health (Dessy andVencatachellum 2007) and in the credit to the private sector (Harrabi et al2007).
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Debt Relief Effectiveness and Institution Building The outcomes
Empirical strategy
The main hypothesis to test would be the actual impact of debt relief onpoverty reduction, but this is not possible at this stage.
Debt relief effectiveness is assessed indirectly, focusing on differentmacroeconomic indicators (Y ) which are related to economic development:
1 real per capita GDP growth,2 the investment rate,3 foreign direct investments over GDP,4 domestic debt over GDP5 the quality of policies and institutions
Empirically, data are averaged over four non-overlapping five years periods(1988-91; 1992-95; 1996-99; 2000-03; 2004-07) and the following equationis estimated with the within-group estimator:
Yi,t − Yi,t−1 = α + β · DEBT RELIEFt−1 + γDt + εi,t
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Debt Relief Effectiveness and Institution Building The outcomes
The Effects of Debt Relief, different sub-periods
(1) (2) (3) (4) (5)Dep. Var.: Change in: GROWTH INV FDI DomD CPIA
Whole sample
1992-95 0.001 0.010 0.165 0.053 -0.0021996-99 0.012** 0.039 0.014 0.078 0.0062000-03 -0.001 -0.076 0.025 0.092 -0.013**2004-07 0.004 -0.023 -0.018 -0.044 -0.001
HIPCs
1992-95 0.002 0.036 0.306** -0.019 -0.0061996-99 0.015** 0.219* -0.114 0.062 0.0012000-03 -0.004 -0.060 -0.085 0.122*** -0.024***2004-07 0.005 0.014 -0.086 0.011 -0.002
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Debt Relief Effectiveness and Institution Building The outcomes
Debt Relief and the Subsequent Institutional Framework, WGI
BDI
BENBFA
BOLCAF
CIV
CMRCOG
COM
ERI
ETHGHA
GINGMB
GNBGUY
HND
HTI
KGZ
LBR
MDGMLI
MOZ
MRT
MWI NER
NICNPL
RWASDN
SEN
SLE
SOMSTPTCD
TGOTZA
UGA
ZAR
ZMB BDI BEN
BFA
BOLCAF
CIV
CMRCOGCOM
ERI
ETH
GHA
GINGMBGNBGUY
HNDHTI
KGZ
LBR
MDG
MLI MOZ
MRT
MWINER
NIC
NPL
RWA
SDNSEN SLE
SOMSTP
TCDTGO
TZA
UGA ZARZMB
−1
−.5
0.5
0 20 40 60 0 20 40 60
2000−2003 2004−2007
Cha
nge
betw
een
t and
t−1
Debt relief at time t−1
Corruption index
BDIBEN
BFABOL
CAFCIV
CMRCOGCOM
ERI
ETH
GHAGIN
GMB
GNB
GUY
HND
HTI
KGZ
LBR
MDG
MLIMOZ
MRT
MWI NER
NICNPL
RWA
SDNSEN
SLE
SOM
STPTCD
TGO
TZAUGA
ZAR
ZMB
BDI
BEN
BFA
BOL
CAF
CIV
CMRCOG
COM
ERI
ETHGHA
GINGMB
GNBGUY
HNDHTI
KGZ
LBR
MDGMLI MOZ
MRT
MWI
NER NIC
NPL
RWA
SDNSEN
SLE
SOM
STP
TCDTGO
TZAUGA ZAR
ZMB
−.5
0.5
0 20 40 60 0 20 40 60
2000−2003 2004−2007
Cha
nge
betw
een
t and
t−1
Debt relief at time t−1
Rule of law index
BDI
BEN
BFA
BOL
CAF CIV
CMRCOG
COM
ERIETH
GHA
GIN
GMB
GNB
GUYHND
HTIKGZLBR MDG
MLI MOZMRT
MWI
NER
NIC
NPL
RWA
SDNSENSLESOM
STPTCD
TGO
TZA
UGA
ZARZMB
BDI
BENBFABOL
CAFCIV
CMRCOGCOM
ERI
ETH
GHAGIN
GMB
GNB
GUY
HNDHTI
KGZ
LBR
MDG MLI MOZ
MRT
MWINER NIC
NPL
RWA
SDNSEN
SLE
SOM STPTCD
TGO TZA
UGA
ZARZMB
−.5
0.5
1
0 20 40 60 0 20 40 60
2000−2003 2004−2007
Cha
nge
betw
een
t and
t−1
Debt relief at time t−1
Voice and accountability index
BDI BEN
BFA
BOLCAF
CIV
CMR
COGCOMERI
ETHGHAGIN
GMBGNB
GUYHND
HTIKGZ
LBRMDGMLI
MOZMRTMWI
NERNIC
NPL
RWASDN
SEN
SLE
SOMSTPTCD
TGO
TZA
UGAZARZMB
BDI
BENBFA
BOL
CAF
CIV
CMR
COG
COMERI
ETHGHA
GINGMB GNBGUYHNDHTI
KGZ
LBRMDG
MLI MOZ
MRT
MWI
NER
NIC
NPL
RWA
SDNSEN
SLE
SOMSTP
TCD
TGO
TZAUGA ZARZMB
−1
−.5
0.5
0 20 40 60 0 20 40 60
2000−2003 2004−2007
Cha
nge
betw
een
t and
t−1
Debt relief at time t−1
Government effectiveness index
BDIBEN
BFA BOL
CAF
CIV
CMRCOG
COM
ERI ETH
GHAGIN
GMB
GNB
GUY
HNDHTI
KGZ
LBR MDGMLI
MOZ
MRTMWI
NER
NIC
NPL
RWA
SDNSEN
SLE
SOM
STPTCD
TGO
TZA UGA
ZAR ZMB
BDI
BEN
BFA
BOL
CAF
CIV
CMRCOGCOMERI
ETH
GHA
GINGMB
GNBGUYHND
HTI
KGZ
LBR
MDG MLIMOZ
MRT
MWI
NERNIC
NPL
RWA
SDNSEN
SLE
SOM
STPTCD
TGO
TZAUGA
ZAR
ZMB
−1
01
0 20 40 60 0 20 40 60
2000−2003 2004−2007
Cha
nge
betw
een
t and
t−1
Debt relief at time t−1
Political stability index
BDI
BEN
BFA
BOLCAF CIV
CMRCOGCOM
ERI
ETH
GHA
GIN
GMB
GNB GUYHND
HTIKGZ
LBR
MDG
MLI
MOZMRT
MWI
NER
NICNPL
RWASDN
SEN
SLE
SOM
STPTCD
TGO
TZA UGA
ZAR
ZMB
BDIBEN
BFA
BOL
CAF
CIV
CMRCOGCOM
ERI
ETHGHA
GINGMB GNBGUYHNDHTI
KGZ
LBRMDG
MLIMOZMRTMWI
NERNICNPL
RWASDN
SEN
SLE
SOMSTPTCDTGO
TZAUGA
ZAR
ZMB
−1
−.5
0.5
1
0 20 40 60 0 20 40 60
2000−2003 2004−2007
Cha
nge
betw
een
t and
t−1
Debt relief at time t−1
Regulatory quality index
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 28 / 32
Debt Relief Effectiveness and Institution Building The outcomes
Results
1 On the whole, debt relief seems to be ineffective, but this is due to timeheterogeneity.
2 Since the end of the nineties, debt relief is associated with increasingdomestic financing and worsening governance in HIPCs.
3 The lack of significance of any shift from external to internal financing inthe last period could be due to poor data availability, while the lack ofevidence of a debt relief curse could be a signal of an increased effectivenessof debt relief in institution building.
4 From 2000 onwards there is no evidence of debt relief triggering economicgrowth (debt overhang).
5 There is no evidence of debt relief (1) having a differentiated impactaccording to institutional quality and (2) being less effective the larger theamount of foreign aid because of the increased management effort requiredto local bureaucrats and of a sort of aid fatigue.
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 29 / 32
Debt Relief Effectiveness and Institution Building The outcomes
Debt Relief and Subsequent Changes of Domestic Debt in HIPCs
BDI BENBFABOLCAF
CIV
CMR
COG
COMETH
GHA
GINGMBGNB GUY
HND
HTIMDGMLI
MOZMRTMWI
NERNICNPL RWASDN SENSLE TCDTGO
TZA
UGAZARZMB
BDIBENBFA
BOL
CAF CIV CMRCOGCOM
ETH
GHA GIN
GMB
GNB
GUY
HND
HTIMDG MLIMOZ
MRT
MWINER
NIC
NPLRWASDN
SEN SLE
TCDTGOTZA
UGA
ZMB
BDIBENBFA
BOLCAF
CIVCMRCOG
COM
ETH
GHA
GINGMB
GNB
GUY
HNDHTIMDG
MLI
MOZ
MRT
MWI
NER
NIC
NPL
RWASDN
SEN
SLE
TCDTGOTZA
UGAZMB
BDIBEN BFA BOL
CAF CIV CMRCOGCOM
ETH
GHA
GIN
GMB
GNB
GUY
HNDHTI MDG MLI
MOZ
MWINER NIC
NPLSDN
SEN SLETCDTGO
TZAUGA ZARZMB
−10
−5
05
10−
10−
50
510
0 10 20 30 40 0 10 20 30 40
0 20 40 60 0 20 40 60
1992−1995 1996−1999
2000−2003 2004−2007
Country Linear fit
Cha
nge
in d
omes
tic d
ebt b
etw
een
t and
t−1
Debt relief at time t−1
Graphs by sub−periods
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 30 / 32
Debt Relief Effectiveness and Institution Building The outcomes
Debt relief and domestic debt (Arnone and Presbitero 2007)
The rising domestic debt in many HIPCs may be an unintended consequenceof the HIPC Initiative.
The program was successful in bringing inflation under control but largeprimary deficits persisted and kept deteriorating through the nineties.
The lack of access to international capital markets and of adequate inflowsof concessional loans are forcing many HIPCs to recur do domestic marketsto tap their financing gap.
The shift from external to domestic financing is likely to undermine theoverall public debt sustainability and is particularly costly, leading to thecrowding out of private sector investment (Christensen 2005; by contrast,Harrabi et al (2007) show that debt relief enhance credit to private sector).
Some of the countries which have low (or declining) poverty reductionexpenditures are also the ones with high or rising domestic debt.
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 31 / 32
Debt Relief Effectiveness and Institution Building Conclusions
Main results
There is not strong evidence of debt relief triggering investment andeconomic growth.
Aggregate indicators on debt service and pro-poor spending hide anheterogeneous picture and can not be evaluated ceteris paribus, given thatdebt relief is often associated with rising domestic debt.
Since the start of the HIPC Initiative donors seem to adopt an ex-postgovernance conditionality and debt relief programs started providing theright incentives to debtors to improve the quality of institutions.
More time and data are required to better establish whether HIPC reliefwere able to achieve its targets, without determining any other side-effect.
The 100% MDRI debt cancelation could be more effective than traditionaldebt relief in helping countries escaping a situation of aid dependence.
AF Presbitero (Univpm) Debt, Institutions & Growth International Monetary Fund 32 / 32