An Evaluation An Evaluation Update of the Update of the

HIPC Initiative HIPC Initiative Comments by:Comments by:Ugo PanizzaUgo Panizza

Research DepartmentResearch DepartmentInter-American Development Inter-American Development

BankBank

Things I Would Have Things I Would Have Looked AtLooked At

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

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

Is debt relief preferable to aid? Is debt relief preferable to aid? Does debt relief bring additional Does debt relief bring additional

resources? resources?

Has debt relief been Has debt relief been successful in permanently successful in permanently

reducing debt levels?reducing debt levels? What I thought before reading the What I thought before reading the

evaluationevaluation No!No! What does the evaluation sayWhat does the evaluation say No!No! Why not?Why not?

Politicians have a high discount rate (W. Politicians have a high discount rate (W. Easterly)Easterly)

Many unsatisfied needs (UN, J. Sachs)Many unsatisfied needs (UN, J. Sachs) IDA lending is concessional but still “sinful”IDA lending is concessional but still “sinful”

IDA lending is concessional IDA lending is concessional but still “sinful”but still “sinful”

How does debt grow?How does debt grow? Debt(t)-Debt(t-1)=Deficit(t)+SF(t)Debt(t)-Debt(t-1)=Deficit(t)+SF(t) The first two explanations focus on The first two explanations focus on

deficitdeficit But if you regress the change in debt But if you regress the change in debt

over the deficit you get an R2 of over the deficit you get an R2 of 0.07!!!!!0.07!!!!!

Share of variance Share of variance explained by the deficitexplained by the deficit

0

0.1

0.2

0.3

0.4

0.5

0.6

LAC ALL EAP ECA IND

R2

Source: Campos, Jaimovich, and Panizza (2006)

Determinants of debt Determinants of debt growthgrowth

-4

-2

0

2

4

6

8

10

12

IND EAP ECA CAR LAC

GDP GrowthPrimary BalanceInterest ExpenditureSF Reconciliation

Source: Campos, Jaimovich, and Panizza (2006)

Stock-Flow Stock-Flow ReconciliationReconciliation

0

1

2

3

4

5

6

7

8

IND EAP ECA MNA LAC

All Observations

ExcludingOutliers

Source: Campos, Jaimovich, and Panizza (2006)

IDA lending is concessional IDA lending is concessional but still “sinful”but still “sinful”

How does debt grow?How does debt grow? Debt(t)-Debt(t-1)=Deficit(t)+SF(t)Debt(t)-Debt(t-1)=Deficit(t)+SF(t) The first two explanations focus on deficitThe first two explanations focus on deficit But if you regress the change in debt over the But if you regress the change in debt over the

deficit you get an R2 of 0.07!!!!!deficit you get an R2 of 0.07!!!!! A big chunk of the difference between change A big chunk of the difference between change

in debt and deficit is explained by valuation in debt and deficit is explained by valuation effects in presence of dollar debt (Campos, effects in presence of dollar debt (Campos, Jaimovich, Panizza)Jaimovich, Panizza)

What about “IDA in UF”? (Hausmann and Rigobon)

IDA lending is concessional IDA lending is concessional but still “sinful”but still “sinful”

How does debt grow?How does debt grow? Debt(t)-Debt(t-1)=Deficit(t)+SF(t)Debt(t)-Debt(t-1)=Deficit(t)+SF(t) The first two explanations focus on deficitThe first two explanations focus on deficit But if you regress the change in debt over the But if you regress the change in debt over the

deficit you get an R2 of 0.07!!!!!deficit you get an R2 of 0.07!!!!! A big chunk of the difference between change A big chunk of the difference between change

in debt and deficit is explained by valuation in debt and deficit is explained by valuation effects in presence of dollar debt (Campos, effects in presence of dollar debt (Campos, Jaimovich, Panizza)Jaimovich, Panizza)

What about “IDA in UF”? (Hausmann and What about “IDA in UF”? (Hausmann and Rigobon)Rigobon)

Has debt relief been successful in Has debt relief been successful in increasing GDP growth and social increasing GDP growth and social

expenditure?expenditure? What I thought before reading the What I thought before reading the

evaluationevaluation Not much, in general (Depetris and Not much, in general (Depetris and

Kraay) and even less in HIPC Kraay) and even less in HIPC countries (Arslananp and Henry) countries (Arslananp and Henry)

What does the evaluation sayWhat does the evaluation say Pretty much what I thought, but hard Pretty much what I thought, but hard

to conduct a formal testto conduct a formal test But why the dismal result?But why the dismal result?

Is debt relief preferable Is debt relief preferable to aid?to aid?

Here there are two viewsHere there are two views No (Arslananp and Henry)No (Arslananp and Henry)

Debt overhang is not an issue for HIPC countriesDebt overhang is not an issue for HIPC countries Aid can build institutionsAid can build institutions

Yes (Birdsall)Yes (Birdsall) DR cannot be tiedDR cannot be tied DR stops defensive lendingDR stops defensive lending DR reduces transaction costs linked to donors’ DR reduces transaction costs linked to donors’

pet programspet programs The evaluation is silent on this issueThe evaluation is silent on this issue Maybe because the issue is relevant only if Maybe because the issue is relevant only if

there is crowding outthere is crowding out

Does debt relief bring Does debt relief bring additional resources?additional resources?

What I thought before reading the What I thought before reading the evaluationevaluation

NONO

Net Resource Transfer to HIPCs

0

2

4

6

8

10

12

14

16

18

1970-79 1980-89 1990-95 1996-99 2000-03

Pe

rce

nt

of

HIP

Cs

GD

P

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

Pe

rce

nt

of

OE

CD

GD

P

Percentage of HIPC GDPPercentage of OECD GDP

Source: Arslanalp and Henry (2006), Table 8

Does debt relief bring Does debt relief bring additional resources?additional resources?

What I thought before reading the evaluationWhat I thought before reading the evaluation NONO What does the evaluation sayWhat does the evaluation say YES!YES! This is an important difference This is an important difference Additionality of debt relief may lead some Additionality of debt relief may lead some

skepticals to change their mind on the skepticals to change their mind on the desirability of debt reliefdesirability of debt relief

If the evaluation department can make a If the evaluation department can make a strong case for additionality, this should be strong case for additionality, this should be the most important message of the report the most important message of the report

An Evaluation An Evaluation Update of the Update of the

HIPC Initiative HIPC Initiative Comments by:Comments by:Ugo PanizzaUgo Panizza

Research DepartmentResearch DepartmentInter-American Development Inter-American Development

BankBank