An Evaluation Update of the HIPC Initiative

1
An Evaluation Update of the HIPC Initiative

• Comments by
• Ugo Panizza
• Research Department
• Inter-American Development Bank

2
Things I Would Have Looked At

• Has debt relief been successful in permanently
  reducing debt levels?
• Has debt relief been successful in increasing GDP
  growth and social expenditure?
• Is debt relief preferable to aid?
• Does debt relief bring additional resources?

3
Has debt relief been successful in permanently
reducing debt levels?

• What I thought before reading the evaluation
• No!
• What does the evaluation say
• No!
• Why not?
• Politicians have a high discount rate (W.
  Easterly)
• Many unsatisfied needs (UN, J. Sachs)
• IDA lending is concessional but still sinful

4
IDA lending is concessional but still sinful

• How does debt grow?
• Debt(t)-Debt(t-1)Deficit(t)SF(t)
• The first two explanations focus on deficit
• But if you regress the change in debt over the
  deficit you get an R2 of 0.07!!!!!

5
Share of variance explained by the deficit
Source Campos, Jaimovich, and Panizza (2006)
6
Determinants of debt growth
Source Campos, Jaimovich, and Panizza (2006)
7
Stock-Flow Reconciliation
Source Campos, Jaimovich, and Panizza (2006)
8
IDA lending is concessional but still sinful

• How does debt grow?
• Debt(t)-Debt(t-1)Deficit(t)SF(t)
• The first two explanations focus on deficit
• But if you regress the change in debt over the
  deficit you get an R2 of 0.07!!!!!
• A big chunk of the difference between change in
  debt and deficit is explained by valuation
  effects in presence of dollar debt (Campos,
  Jaimovich, Panizza)
• What about IDA in UF? (Hausmann and Rigobon)

9
IDA lending is concessional but still sinful

• How does debt grow?
• Debt(t)-Debt(t-1)Deficit(t)SF(t)
• The first two explanations focus on deficit
• But if you regress the change in debt over the
  deficit you get an R2 of 0.07!!!!!
• A big chunk of the difference between change in
  debt and deficit is explained by valuation
  effects in presence of dollar debt (Campos,
  Jaimovich, Panizza)
• What about IDA in UF? (Hausmann and Rigobon)

10
Has debt relief been successful in increasing GDP
growth and social expenditure?

• What I thought before reading the evaluation
• Not much, in general (Depetris and Kraay) and
  even less in HIPC countries (Arslananp and Henry)
  
• What does the evaluation say
• Pretty much what I thought, but hard to conduct a
  formal test
• But why the dismal result?

11
Is debt relief preferable to aid?

• Here there are two views
• No (Arslananp and Henry)
• Debt overhang is not an issue for HIPC countries
• Aid can build institutions
• Yes (Birdsall)
• DR cannot be tied
• DR stops defensive lending
• DR reduces transaction costs linked to donors
  pet programs
• The evaluation is silent on this issue
• Maybe because the issue is relevant only if there
  is crowding out

12
Does debt relief bring additional resources?

• What I thought before reading the evaluation
• NO

13
Net Resource Transfer to HIPCs
18
0.14
16
0.12
Percentage of HIPC GDP
Percentage of OECD GDP
14
0.10
12
0.08
10
Percent of OECD GDP
Percent of HIPCs GDP
8
0.06
6
0.04
4
0.02
2
0
0.00
1970-79
1980-89
1990-95
1996-99
2000-03
Source
Arslanalp and Henry (2006), Table 8
14
Does debt relief bring additional resources?

• What I thought before reading the evaluation
• NO
• What does the evaluation say
• YES!
• This is an important difference
• Additionality of debt relief may lead some
  skepticals to change their mind on the
  desirability of debt relief
• If the evaluation department can make a strong
  case for additionality, this should be the most
  important message of the report

15
An Evaluation Update of the HIPC Initiative

• Comments by
• Ugo Panizza
• Research Department
• Inter-American Development Bank