International Political Economy of Truth Commissions: Reputations

and Lending in the Aftermath of Transitions

Andrea Abel

June 3, 2008

1 Introduction

The last 30 years has seen close to 70 countries transition from situations of authoritarianism,human rights abuses, genocide and civil conflict towards some form of liberalism or democracy, witha high degree of variation in levels of success. Whilst states have been cycling in to and out of suchsituations since at least the 18th Century with the French Revolution, it is only in the last 30 yearsthat transitional justice mechanisms have become an integral part of the transition process.

Transitional justice is a broad term encompassing processes ranging in degree of legalization and for-mality from formal prosecution by international or domestic courts, to lustration1 to truth commissions(TCs). The notion behind all forms of transitional justice is that a country must somehow reconcileitself with its abusive past; this in turn should lead to an environment characterised by accountability,and a concerted attempt to build trust and a sustainable peace2. What form, if any, the transitionaljustice mechanism a country will adopt depends on many political and economic factors, but one of themost pertinent determinants according to the transitions literature is the method by which the transi-tion occurs3. In particular, transitions that have occurred through some form of negotiated settlementoften have terms and conditions that lead to highly legalized forms of justice such as prosecutions beingruled out. Yet in some of these instances, instead of leaving the past be and moving on, the new regimehas gone through the costly and voluntary process of implementing truth commissions4. What explainswhy some countries voluntarily adopt TCs whilst others do not?

I argue that voluntary TCs have served as a costly signal to the international community, conveyinginformation about the type (here defined simply in a dichotomous ‘good’/‘bad’ manner) of regime thathas emerged from the transition. I refer to a good type of regime as one that is committed to reform

1This mechanism is particularly prevalent in former Eastern European Soviet satellite states, and entails barring frompublic office any individual that held positions of power in the ancien regime or its police apparatus

2P.van Zyl, “Promoting Transitional Justice in Post-Conflict Societies”, Security Governance in Post-conflict PeaceBuilding, DCAF Publication, 2005.

3There is a large degree of variation in the manner in which transitions have occurred, ranging from negotiatedsettlements between opposing parties, to internal collapse of the ancien regime (as in many Eastern European cases), tovoluntary hand-over by the ancien regime, to a decisive victory by one side in an armed conflict.

4Of course there are cases where Truth Commissions are implemented as a complementary mechanism to prosecutions,which is also a curious phenomenon.

in the areas of human rights practices, democratization, and political stability through reconciliation.This good type of government is prepared to make short-term sacrifices such as stirring up memoriesof recent atrocities which could lead to potential violence and instability, to achieve long term gains forthe society they represent; it has a long ‘shadow of the future’. Moreover, the good type of governmentis interested in building a good reputation for itself in the eyes of the international community. AsSkaar puts it, “Since most new democratic governments are eager to send signals to the internationalcommunity of complying with good governance’ procedures, a poor human rights record left unattendedmay harm their reputation”5. The bad type of government, on the other hand, is short-sighted, caringmore about maximizing interests in the immediate term, and has little or no regard for how it is viewedin the international arena. I further argue that the TC signal is costly not only because of the materialinvestments that need to be made in following through on such a process but also because the scope ofthese commissions generally leaves no party immune from investigation; thus, it can be more than justa propaganda tool of the new regime.

One of the groups within the broader international community for whom this signalling mechanismhas been especially important, I argue, are official international lenders. In the aftermath of a transition,lenders face uncertainty with respect to the type of regime they face; How likely is the new regime todefault on their loan obligations? To what extent is the new regime a reflection of the old one? Farber6

argues that a government that is committed to human rights reform by entrenching practices in theconstitution, “can signal a willingness to give up power in the short-term to obtain long term benefits”7.He goes on to argue that investors can infer from this that the government has a low discount rate andtherefore poses a lower risk of expropriation. If, as I suggest, voluntary TCs act as a signal about agovernment’s type as I have defined it, then investors should be able to infer from this signal the type ofgovernment they are facing. My argument relies to a degree on the notion of ‘reputational spill-overs’,elaborated upon in Section 2. The result of voluntary implementing TCs, I argue, has been a morefavorable terms of lending for transitioning states with voluntary TCs, than ones without.

What is it exactly that investors learn about the regime when they see the TC signal? I suggestthat adopting a TC is akin to a public acknowledgement that the past regime(s) were unjust, partakingin actions and activities that are considered at worst a perverse abuse of human rights. This publicacknowledgement means that a regime can more easily be held accountable to standards that theythemselves have accepted as appropriate, if they were to fall back into the types of practices engaged inpreviously. A regime that did relapse would be seen as untrustworthy. From this perspective, then, aregime that went through the process of adopting a TC voluntarily would be seen as trying to distanceitself from the practices and ideals of past eras, wanting a clean-slate upon which to build it’s reputationas a good type.

Why might official lenders give better loan terms to countries that voluntarily implement TCs than5E.Skaar, “Truth commissions, trials - or nothing? Policy options in democratic transitions”, Third World Quarterly

20:6,19996D.Farber, “Rights as Signals”, The Journal of Legal Studies 31:1, 20027Ibid. pg. 83

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to those that do not? There are (at least) three possible mechanisms by which this outcome mightarise. Official lenders might have a normative commitment to transitional justice and TCs in particluar;they might think that these processes are an integral part of any transition representing an attempt todeal with past injustices. In this way, any country that adopts a TC is seen as embracing this normof justice and accountability, and is thus given preferential loan conditions (regardless of probability ofdefaulting on loans). Alternatively, it might be the case that adopting TCs leads to democratizationand political stability, and that democratic and stable regimes have lower probabilities of default andthus recieve better terms of lending. A third mechanism, and the one which I argue is at play, is thatthere are “repuational spillovers” from the arena of human rights and democratization, to the arena ofinternational lending. A voluntary TC acts as a signal of government type; a government that starts tobuild a good reputation for itself in the area of human rights and democratization will see this reputa-tion carried over to the way lenders interact with it when it comes to loans. In the face of uncertaintywith respect to probabilities of default by emergent regimes, lenders view the actions taken by a regimeto build its reputation as some form of information about likelihood of default. An emergent regimethat implements a voluntary TC does so in an attempt to build a good reputation for itself, and will,for the same reason, be more committed to repaying its debt obligations; they will in turn be rewardedby better terms of lending.

The bad news, I argue, is that as TCs become a seemingly indispensable part of comprehensivepeace treaties and become externally mandated by the terms of settlement rather than being a voluntaryaction, they lose their worth as a separating equilibrium between regime types. Subotic8 argues that themotivation of states to adopt transitional justice mechanisms has changed over time; with the diffusionof the justice ‘norm’ through the international system, states now adopt these mechanisms to gaininternational legitimacy and appease international coercion, rather than because of domestic demandand a state’s commitment to human rights reform and democratization, as used to be the case. In thespecific context of TCs, I argue firstly that in those cases where TCs are implemented at the behest ofexternal forces such as the UN9, very little can be infered about government type since it is not clearwhich governments would have adopted TCs voluntarily left to their own devices. Secondly, I suggestthat as TCs take on this air of being the ‘international norm’, states that are now adopting these TCsvoluntarily may be doing so purely to get the ‘check’ in the box next to international expectationsabout transitional justice.

Thus, the signal to lenders from adopting a TC voluntarily has become too noisy to provide usefulinformation about the type of regime they are facing. The result has been an ‘equalization’ in theterms of lending being offered to states that have voluntary TCs and those with mandated TCs. Table1 shows the trends in TC implementation since 1989, for the countries considered in this analysis. Notethat the numbers of voluntary and mandated TCs are cumulative.

8J.Subotic, “Hijacked Justice:Domestic Appropriation of International Norms”, Working Paper no. 28, Presented atthe 2005 International Studies Association Meeting, 2005

9For example, the UN has mandated truth commissions in El Salvador, Guatamala, Sierra Leone, East Timor andLiberia

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Table 1: Trends in Truth Commission implementation since 1989 for the data used in the analysis.

Year No. of Country Observations Voluntary TCs Mandated TCs1989 37 0 01990 37 0 01991 38 0 01992 49 1 11993 56 1 21994 57 4 21995 57 5 21996 57 5 31997 57 6 31998 57 6 31999 58 7 32000 58 8 32001 58 9 32002 58 11 42003 58 13 52004 58 13 62005 58 13 62006 58 13 7

If my argument has any validity, we should expect to find at a minimum some evidence that lendersare concerned with human rights, reconciliation and/or democratization. Evidence of concern fortransitional justice and truth commissions as a signal of either commitment to reform in these areas,or of a good type of government, would strengthen my argument even more.

The World Bank is one of the largest multi-lateral lenders to transitioning countries. Speaking to theBank’s Development Committee in 2005, then Bank President James Wohlfensohn argued that “..Thereis, moreover, widespread recognition of the strong link between human rights and development... TheBank’s work substantially contributes to the realization of rights of people in a number of areas..”10.The Bank’s concern for human rights led to the commissioning of an official Legal Opinion with respectto the work of the World Bank; it concludes that “there are instances in which the Bank may takehuman rights into account, and others in which it should”11. Moreover, as part of its engagement withresearch on Justice Reform in Fragile States12, the Bank commissioned a report on Gender, Justiceand Truth Commissions which concluded that “The role of TCs in the development of new societies isfundamental. For that reason, the process followed in establishing a TC should command the attentionof international development agencies and donors”13.

The IMF is another key player in the lending market for transitioning and post-conflict societies.In order for a state to receive loans from the IMF, it is required to write a letter of intent together

10Note of the President of the World Bank, Mr. James D. Wolfensohn, to the Development Committee, in StatementsSubmitted to the Seventy-First Meeting of the Development Committee, World Bank, Washington D.C. May 25, 2005.

11“Legal Opinion on Human Rights and the Work of the World Bank”, January 200612Justice Reform in Fragile States is part of the Bank’s division on Law and Justice Institutions13“Gender, Justice and Truth Commissions”, World Bank Report 2006, http://siteresources.worldbank.org/INTLAWJUSTINST/Resources/GJTClayoutrevised.pdf

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with a memorandum of economic and financial policies, and, ultimately, is encouraged to develop a“Poverty Reduction Strategy Paper”. Sierra Leone’s letter of intent for 2003 explicitly emphasized thesetting up of the Truth and Reconciliation Commission as part of its efforts to establish peace andpolitical reconciliation, which was a major part of its initial phase in its poverty reduction strategy.Furthermore, in a 2003 interview conducted with the then World Bank country director for Sierra Leone,Mats Karlsson about the newly approved $40 million grant to Sierra Leone, Mr. Karlsson emphasizedthe role of the Truth and Reconciliation commission in rebuilding the country’s social capital anddeepening its democratic culture14. In a similar vain, Burundi’s Poverty Reduction Strategy Paper for2006 posits as a central element of its poverty reduction and growth strategy, the establishment of aTruth and Reconciliation Commission. The government’s aim in following through on this was statedas establishing “truly pacific cohabitation, prevent new conflicts, and put an end to the cycle of violencethat impedes development and intensifies poverty”15.

The OECD’s Development Assistance Committee also weighs heavily in the community of interna-tional lenders. Their guidelines for helping prevent violent conflict notes that “establishing the condi-tions necessary to promote justice and reconciliation is an essential task for societies in transition.”16.The DAC goes on to suggest that “The establishment of Truth and Reconciliation Commissions orCommittees provide an opportunity to deal with the feeling of injustice ... with regard to atrocitiescommitted by the state or other groups.”17.

These anecdotal pieces of evidence suggest that international lenders not only take heed of theactions being taken by regimes in the areas of human rights, democratization and reconciliation, butconsider such actions necessary in the development of post-atrocity societies. Furthermore, the factthat transitional justice procedures are explicitly emphasized in the guidlines for operation and in therequisite justifications for borrowing for some of these lenders is encouraging for my hypothesis aboutbetter terms of lending for countries that adopt these procedures. It seems that transitional justicemechanisms (and perhaps TCs in particular) are becoming part of an ‘international norm’ for transi-tioning states. What still remains murky, however, is the mechanism that links the action (adopting aTC voluntarily) to the outcome (better terms of lending); is it purely a normative concern on the partof lenders, an institutional story, or a reputational spillover effect? I aim to shed some light on thisquestion in the following anaylsis.

The paper proceeds as follows; Section 2 reviews the existing theories on determinants and conse-quences of Truth Commissions and the determinants of International lending, Section 3 formalizes theidea of voluntary truth commissions as a separating equilibrium between regime types in the lendingarena, Section 4 provides empirical evidence for the argument, and Section 6 concludes.

14Article can be found at http://web.worldbank.org/WBSITE/EXTERNAL/NEWS/0,,print:Y isCURL:Y contentM,“Optimisim on Sierra Leone”

15“Burundi: Poverty Reduction Strategy Paper, 2006”, IMF publication, Section 6.2.1.3; “Manage disputes related tothe past and anticipate the future”, Article 265.

16The DAC Guidlines:Helping Prevent Conflict, www.oecd.org/dac/guidelines, p.g. 5717DAC Asia-Pacific Regional Consultation on Peace, Conflict and Development Co-operation, 2000

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2 Truth Commissions and International Lending: Existing Theories

2.1 Truth Commissions

Why do some countries adopt Truth Commissions voluntarily whilst others do not? There are twoaspects of this question that are addressed in the literature; firstly, under what circumstances willwe see TCs forming? and secondly, what are the consequences of adopting a TC? The second ques-tion is more salient for the argument of this paper, but I address the literature on both questions below.

Explanations about the circumstances under which we see TCs forming have tended to divide alongthe political-economic dimension; political explanations for why TCs form focus on the manner inwhich the transition has taken place, while key economic explanations focus on the monetary abilityof new regimes to implement such a costly mechanism. Brahm argues that when political transitionis brought about through negotiation rather than outright victory by one party, TCs are attractive asa balance between the demands for accountability and the fact that “perpetrators often retain someinfluence over the course of the transition”18. In a similar vain, Backer19 claims that when there is abalance of power between the incumbent and opposition forces, other maximal forms of justice mightbe infeasible and countries will instead tend to opt for Truth Commissions. Another political basedexplanation posited by Crocker relates to the strength of civil society; “Civil society groups have playedcrucial roles in establishing truth commissions”20. Olson et al.instead focus on economic explanationsfor Truth Commissions; they argue that since TCs are a costly form of transitional justice, “thosecountries facing pressing economic considerations and hard constraints are less likely to adopt them”21.That is, the lower the GDP per capita of a country at the time of transition, the lower the probabilityof that country adopting a TC.

These explanations all seem at least theoretically plausible, however, the range of cases in whichvoluntary TCs have been implemented cuts across both the manner of transition, and economic capa-bility cleavages. Voluntary TCs have been implemented in instances of gradual democratization such asChile and South Africa, military victory by rebels as in Chad and rapid democratization after militaryrule as in Argentina (refer to Table 2 to see the range of cases in which TCs have been implemented).I would argue that a substantial part of the story is missing when considerations of the intentionalityof the new regime are ommitted from the analysis.

A second line of theorizing about the adoption of TCs focus on the tangible outcomes from theprocess. The pessimistic view is that there are at best no positive outcomes from adopting a TC, and

18E. Brahm, “Uncovering the Truth: Examining Truth Commission Success and Impact”, International Studies Per-spective, Volume 8 2005.

19D.Backer,“Cross-National Comparative Analysis.” In Audrey Chapman, Hugo van der Merwe and Victoria Baxtereds. Assessing the Impact of Transitional Justice: Challenges for Empirical Research. Washington, DC: USIP Press,forthcoming.

20D.A.Crocker,“Truth Commissions, Transitional Justice, and Civil Society”, Forthcoming in Robert I. Rotberg andDennis Thompson, eds. Truth v. Justice: The Moral Efficacy of Truth Commissions: South Africa and Beyond, PrincetonUniversity Press, pg. 17

21T.Olsen, L.A. Payne and A.G. Reiter, “At What Cost? A Political Economy Approach to Transitional Justice”,Under Review

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at worst, it makes a transitioning country less stable, and more susceptible to relapses of violence orconflict22 . TC optimists cite three main areas in which these commissions have an impact, and thusadvocate them as a form of transitional justice; the process of democratization23, improvements inhuman rights practices24 and reconciliation25.

Each of these purported positive outcomes has potentially enormous normative value, and mightindeed be the reason we see TCs becoming increasingly popular in the international community, in aphenomenon termed the “justice cascade” by Lutz and Sikkink26, but is there any evidence to supportthese theoretical claims? Brahm27 looks at the effect of TCs on the future human rights practices ofa country, and finds that they have little impact. Kenney and Spears28 look at the impact of TCson democratization in Latin American Countries, and find a positive and significant relationship be-tween having conducted a TC and the Polity measure of Democracy. Gibson29 assesses the relationshipbetween TCs and reconciliation using a survey of 3,700 South Africans in 2001. He finds that thereis a positive and significant relationship between uncovering the ‘truth’ via the South African TRC,and the degree of reconciliation in South Africa. Lie et al.30 examine the relationship between TruthCommissions and Post-conflict peace duration, and find a positive but insignificant affect of the formeron the latter. The empirical assessment of the normative impact of TCs is both relatively scarce, andseemingly inconclusive. Furthermore, a pertinent question arises regarding the direction of causalitybetween adopting a TC and these outcomes; are countries that adopt voluntary TCs more apt to achievethese normative goals, or are countries that were prone to achieve these goals anyway more likely toadopt voluntary TCs?

The signalling hypothesis I present posits that states adopt voluntary TCs with a mind to democra-tization, human rights reform and political stability. The idea that TCs serve as a costly signal (at leastto the domestic audience of a state) has been put forward in the work of Kulkarni31, who argues thatTCs can affect the level of social trust within a transitioning state through signaling. The signal affectsprobabilistic beliefs about the actuality of changes in rules and norms of governance. The problem that

22See for example J.L. Snyder and L. Vinjamuri, “Trials and Errors: Principle and Pragmatism in Strat- egies ofInternational Justice”, International Security Volume 28, 2003.

23M.Minow,“Between Vengence and Forgiveness:Facing History after Genocide and Mass Violence”, Beacon Press, 1998,and M.Freeman and P.Hayner, “Truth Telling” in Reconciliation after Violent Conflict, Stockholm Institute for Democracyand Electoral Assistance, 2003

24See for example A.Chapman and P.Ball, “The Truth of Truth Commissions: Comparative Lessons from Haiti, SouthAfrica and Guatamala”, Human Rights Quarterly Volume 23, 2001 , or A. Boraine, “Truth and Reconciliation in SouthAfrica: The Third Way”, in Truth v. Justice: The Morality of Truth Commissions, Princeton University Press, 2000.

25See for example, P.B. Hayner,“Unspeakable Truths:Confronting State Terror and Atrocity”, Routledge, 200126E. Lutz and K. Sikkink, “The Justice Cascade: The Evolution and Impact of Foreign Human Rights Trials in Latin

America”, Chicago Journal of International Law 2:1, 200127E.Brahm, “A Multi-Method Exploration of Truth Commissions: The Development of Human Rights Practices in

Post-Transitional Societies”, Paper prepared for APSA, 200628C. Kenney and D. Spears, “Truth and Consequences: Do Truth Commissions Promote Democratization?” Paper

presented at the annual meeting of the American Political Science Association, 200529J.L.Gibson,“Overcoming Apartheid: Can Truth Reconcile a Divided Nation?”, The ANNALS of the American

Academy of Political and Social Science 603(1), 200630T.G.Lie,H.M.Binningsbo and S.Gates,“Post-Conflict Justice and Sustainable Peace”, World Bank Policy Research

Paper, April 1 200731A. Kulkarni, “Truth Commissions: Institutional Strategies for Trust Construction and Conflict Management”,Research

Paper, Stanford University, 1999

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any new regime faces according to this line of argument, is one of making a credible commitment toreform. Boetkke and Coyne32 also argue that in the period of transition a regime is confronted by atwo pronged problem of establishing credible commitments to bind itself and also to signal effectivielythat these commitments are credible.

The notion of being able to make credible committments arises in areas ranging from ending violencein civil wars33, signalling foreign policy intentions34, transitions to democracy35, and sovereign debt36.In short, in the absence of a third party guarantor, there exist many strategic situations in which actorsare unable to commit themselves to carrying out actions which they have agreed to previously. Atleast one actor, if not both, has incentives to deviate from the agreement at hand, making themselvesostensibly better off and the other party worse off then if they had stuck to the agreement. One way inwhich a commitment can be made credible is if there is some form of costly signal involved in makingthe commitment; actors can either ‘tie their hands’, or ‘sink costs’. I argue that voluntary TCs may bea hybrid form of costly signal. On the one hand, it is a sunk cost because of the material investmentsput in to it, on the other hand it ties the hand of the new regime in that since everyone can be heldaccountable in these TCs if the new regime renegs on the process once it starts to be investigated, boththe domestic and international audiences can see that the commitment to reform was not credible.Thus, the signal is relevant not just for the domestic audience of the transitioning state, but for theinternational community as well; initiating the process of building a good reputation - which, I argue,is key in the arena of international lending.

How might building a good reputation in an area such as human rights and democratization, affect astate’s reputation in the lending arena? I argue that reputations spill-over from one area or relationshipbetween states to others; this rests on the assumption that “countries have general traits that affecttheir behaviour across a wide range of interaction”37. Cole and Kehoe38 develop a general reputationmodel where if a government is seen as being untrustworthy in one particular relationship, it will be seenas untrustworthy in other relationships. They suggest that this mechanism is why we see governmentshonoring their debts, and why a positive debt level can be sustained; in particular, “a government’sactions in the debt arena must spill over to a different arena in which trust is important”. Rose andSpiegel39 examine the spillover effects across environmental and economic spheres; specifically, theylook at whether participation in non-economic partnerships (international environmental arrangements(IEAs) in specific), enhances economic relations. They argue that a countries willingness to participatein environmental partnerships is indicative of the discount rate of the regime, which sends a signal

32P.J. Boetkke and C.J. Coyne, “The Political Economy of Forgiveness”, Society 44:2, 200733See for example B. Walter, “Designing Transitions from Civil War: Demobilization, Democratization, and Commit-

ments to Peace”, International Security 24:1, 199934See J. Fearon, “Signalling Foreign Policy Interests: Tying Hands versus Sinking Costs”, Journal of Conflict Resolution

41:1, 199735See M. Nalepa, “The Problem of Credible Commitments in Transitions to Democracy”, Working Paper at

http://ruf.rice.edu36B.E. Hermalin and A. K. Rose, “Risks to Lenders and Borrowers in International Capital Markets”, NBER Working

Paper 199937Tomz 2007, pg. 23838H.L.Cole and P.J.Kehoe, “Models of Sovereign Debt: Partial Versus General Reputations”, International Economic

Review 39:1, 199839A.K.Rose and M.M.Spiegel, “Non-Economic Engagement and International exchange: The Case of Environmental

Treaties”, CEPR Discussion Paper No. 5942, 2006

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“concerning a country’s debt capacity”40. The idea of reputational spillovers has played a role inthe theory of organizations as well. For example, Wickes et. al41 argue that managers that actopportunistically toward a particular stakeholder in an organization will likely affect not only futureinteractions with that stake- holder but other relationships as well. In sum, I suggest that there isreason to believe that the behaviour of a state in one arena is not considered in isolation from itsbehaviour in other arenas. Making or breaking a good reputation in one area will affect perceptionsand behaviour in others.

2.2 International Lending

What political determinants are there to the terms and conditions under which international in-vestors lend to sovereign borrowers, and in particular, transitioning sovereign borrowers? One plausibletheory posits regime type (defined specifically with respect to democratic institutions rather than my‘good’/‘bad’ dichotomy), as a determining factor of loan conditions. North and Weingast42 and Schultzand Weingast43 argue that “representative institutions enhance a state’s borrowing power”44, and hencedemocracies have better lending terms than non-democracies. Saeigh45 empirically assesses this notionof democratic advantage in lending and finds that for less developed countries at least, their is noevidence for this theory. Brewer and Rivoli46 argue that it is not regime type per-se but rather regimestability that affects loan conditions. They find that a country’s perceived credit-worthiness (and henceits loan conditions) are negatively and significantly correlated with regime stability. These argumentswould be in line with the second mechanism linking voluntary TCs and better terms of lending; adop-tion of this process leads to institutional reform (more democratic and stable political institutions),and it is because of these institutional characteristics that those states get lower interest rates. Giventhat the process of democratization and institution building is relatively a long one, this mechanismmay face hurdles explaining the lower rates of interest seen in the short run aftermath of transitions.

A more conspiratorial theory of international lending focuses on the strategic interests of lenders.Thacker47 for example, finds that voting with the US on key UNGA votes, are substantially more likelyto receive IMF loans than other countries. Andersen et al.48, also find that voting similarity with theUS on key UNGA issues, was a significant determinant of the volume of World Bank concessional loans.In the case of official international lending, this argument may hold some water though the strategicpolitical value of many of these transitioning countries for the OECD countries (in particular the US)is questionable.

40Rose and Spiegel, p.g. 241A.C.Wicks, S.L.Berman and T.M.Jones, “The Structure of Optimal Trust: Moral and Strategic Implications”, The

Academy of Management Review 24:1, 199942D. North and B.Weingast, “Constitutions and Commitment”, Journal of Economic History, Volume 69, 1989.43K. Schultz and B. Weingast, “The Democratic Advantage”, International Organization, Volume 57, 2003.44Schultz and Weingast, p.g 1445S.M.Saeigh, “Do Countries have a democratic advantage?”, Comparative Political Studies, Volume 38, 200546T.L.Brewer and P. Rivoli, “Politics and Perceived Country Credit-worthiness in International Banking”, Journal of

Money, Credit and Banking 22(3), 1990.47S. Thacker, ”The High Politics of IMF lending”, World Politics, 52, 1999.48T. Andersen, T.Harr and F.Tarp, ”US politics and World Bank IDA-lending”, Discussion Papers, Institute of Eco-

nomics, University of Copenhagen, 2005

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The theory of international lending upon which my argument is based is a reputational one; goodterms of lending are positively correlated with good reputations which can be acquired over time.Tomz49 has argued that reputation matters when states are making lending decisions to other states,after accounting for mitigating circumstances. He argues that once a government’s type50 has beendetermined, it can alter its reputation only by acting contrary to the expectations of creditors. Thus,once labeled a lemon, it takes a costly signal on the part of the government to “wipe the lemon stainfrom its credit record”51. An implication of his theory is that investors offer worse credit to unprovengovernments to account for their uncertainty about government type. Furthermore, this lemon-premiumis roughly the same for all new borrowers in the same cohort, in the face of low levels of informationwith which to discriminate amongst these borrowers. Similarly, Diamond52 argues that in the face ofimperfect information, different types of borrowers are lumped together and initially charged the sameinterest rate, and that reputations arise from learning over time.

I believe that Tomz’ theory of reputation53, has much to offer when we consider the case of transi-tioning countries, which can be viewed as the equivalent of the emergence of a new cohort of borrowers.This framing leads naturally to the notion of uncertain beliefs about government type from the perspec-tive of the lenders. Tomz’ theory would suggest that the terms of lending should be roughly equivalentfor these borrowers, but I argue that voluntary TCs can act as a costly signal with which lenders’ canupdate their beliefs about the type of government they face in the aftermath of transition. Thus thereshould be variation in terms of lending within this cohort of borrowers. Alvarez-Plata and Bruck54

examine cases of post-conflict lending and argue that the key to ‘normalizing’ relations between post-conflict states and creditors is to rebuild trust by gaining credibility with lenders. I argue that thesignal given out by a voluntarily implemented TC works toward gaining such credibility.

3 Truth Commissions as a Costly Signal: Formal Model

3.1 Voluntary Truth Commissions

Consider a transitioning state where nature determines the type of regime (θ) that emerges fromthe transition process; with some probability p a ‘good’ type of regime (θG) emerges, and with prob-ability 1 − p a ‘bad’ type of regime (θB) emerges.The regime knows its type, but this is unobservableinformation for the official international lenders who are considering what terms of lending to impose

49M. Tomz, “How do Reputations Form? New and Seasoned Borrowers in International Capital Markets”, AmericanPolitical Science Association presentation, 2001

50Here, type refers to one of three categories; lemons (a government that defaults under any circumstances), fair-weathers(a government that repays when times are good and may not repay when times are bad), and stalwarts (a governmentthat repays no matter what)

51Tomz, p.g. 352D.W.Diamond, “Reputation Acquisition in Debt Markets”, The Journal of Political Economy 97(4), 198953This theory is presented in great detail in M. Tomz, “Reputation and International Cooperation:Sovereign Debt across

Three Centuries”, Princeton University Press, 200754P. Alvarez-Plata and T. Bruck, “External Debt in Post-Conflict Countries”, German Institute for Economic Research,

Berlin, 2006.

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on the emergent regime. I assume that regime type is static; this is for simplicity of modeling, and Iacknowledge that this may not be an accurate reflection of reality. Assume that the official internationallending market has limited competition and that a strategic offical lender is represented by L. L canobserve whether or not the emergent regime voluntarily implements a TC. Based on this observation,L decides what gross interest rate (q) to charge the emergent regime.

Assume a stylized loan of size 1 unit, which yields a gross return to the emergent regime of r; Iam implicitly assuming that the emergent regime is able to generate revenue from the loan it gets, butremain silent as to how this revenue is generated (whether by legitimate investments in developmentor other projects, or by other dubious forms of investment). The probability that an emergent regimerepays the loan is given by b(θ), where I assume that b(θG) = 1. That is, the good type of regimerepays for sure under all circumstances. This characteristic is similar to that of the ‘stalwart’ type ofgovernment in Tomz’ repuational story55. I further assume that b(θB) < 1. L will demand a pricefor the loan that makes him indifferent between lending to an emergent regime and being repaid withprobability b(θ) versus investing in a ‘risk-free’ asset which yields a gross return of f with certainty.This formulation is is based on the conventions in the literature on asymetric information in lendingmarkets, see for example Parlour and Rajan56. The idea is that all n lenders set their interest ratesimultaneously, thus the model becomes one of Bertrand competition amongst the lenders. This drivesthe interest rate toward that which holds for the zero profit condition; q = f

b(θ) . From the emergentregime’s perspective, there is also a cost, T , of setting up and following through the TC process. Thus,the expected payoff to the emergent regime if they implement a TC voluntarily is r− b(θ) ∗ q− T , andthe payoff from not implementing a TC voluntarily is simply r − b(θ) ∗ q.

For the above game, there exists a signalling equilibrium where θG implements a voluntary TC forsure whilst θB does not implement a voluntary TC for sure. This has the consequence that θG recievesbetter terms of lending than θB (as defined by a lower rate of interest).

Upon seeing a voluntary TC being implemented, L knows for sure that it faces θG, and hence thatb(θG) = 1. Given this, L will set the interest rate to be q = f

b(θG)= f ; let this interest rate be denoted

qG. At the same time, when L sees no voluntary TC being implemented, it knows for certain that itis facing θB, with b(θB) < 1 for sure. The interest rate L will set is q = f

b(θB), denoted qB, which is

necessarily larger than qG.Do either θG or θB have an incentive to deviate from this equilibrium? This will depend on the

cost T of implementing a voluntary TC. In particular, θB will want to implement a voluntary TC ifthe following condition holds:

r − b(θB) ∗ qG − T︸ ︷︷ ︸Payoff from implementing voluntary TC

> r − b(θB) ∗ qB︸ ︷︷ ︸Payoff from not implementing a voluntary TC

(1)

55M. Tomz, “Reputation and International Cooperation: Sovereign Debt across Three Centuries”, Princeton UniversityPress, 2007

56C.A.Parlour and U. Rajan, “Competition in Loan Contracts”, The American Economic Review 91:5, 2001

11

or

r − b(θB) ∗ f − T > r − b(θB) ∗ f

b(θB)(2)

T < f ∗ (1 − b(θB)) (3)

Similarly, θG will not want to implement a voluntary TC if the following condition holds:

r − qB︸ ︷︷ ︸Payoff from not implementing a voluntary TC

> r − qG − T︸ ︷︷ ︸Payoff from implementing a voluntary TC

(4)

or

r − f

b(θB)> r − f − T (5)

T >f ∗ (1 − b(θB))

b(θB)(6)

The range of voluntary TC costs for which the separating equilibrium holds is thus

f ∗ (1 − b(θB)) < T <f ∗ (1 − b(θB))

b(θB)

3.2 Mandated Truth Commissions

Now consider the case where Truth Commissions are no longer a choice for the emergent regime,but are mandated by external sources as a part of the transition process.The basic set up of the lendinggame is the same as above, except that in this case, there is only one strategic player, L. In this case,both types of emergent regime must pool on TC.

Upon seeing a TC being implemented, L learns nothing about the type of regime it faces; hisposterior beliefs about regime type are the same as his prior beliefs. With probability p, L believes heis facing θG, and with probability 1 − p, L believes he is facing θB. Without being able to distinguishbetween types, L will charge both θG and θB the same interest rate; furthermore, this interest rate willbe one such that the payoff to the lender from lending to an emergent regime is equal to the payofffrom the risk-free investment. This is expressed as follows;

p ∗ q + (1 − p) ∗ b(θB) ∗ q = f (7)

q∗ =f

p+ (1 − p) ∗ b(θB)(8)

The implications for this can be seen with some basic comparative statics. For any p < 1, andany b(θB) < 1, the interest rate, q∗, charged to any emergent regime will be greater than the interestrate charged to θG in the signalling model with the separating equilibrium outlined above. Consider acase where for example, b(θB) = 0.9 (that is, the probability that a bad type of regime repays is quitehigh) and p = 0.5, that is the lender believes that the odds of a good type of regime emerging after a

12

transition are 50-50. The equilibrium interest rate in such a scenario is given by f0.95 , which is greater

than qG = f from the separating equilbrium model, but less than qB = fb(θ) = f

0.9 . Thus, the goodregime type is made worse off, whilst the bad regime type benefits from pooling on mandated TCs.

3.3 Observable Implications

Based on the signalling game above, the following three hypotheses emerge to be tested empiricallyin Section 4.

Hypothesis One: Emergent regimes that implement a TC voluntarily will recieve lower interest rateson official loans from international lenders then emergent regimes that do not implement a TC volun-tarily.

Hypothesis Two: Emergent regimes that are required to implement a TC will recieve interest rates onofficial loans that are higher than the rate they would have recieved had they voluntarily implementedthe TC (upon being given the choice).

Hypothesis Three: As mandated TCs are becoming more frequent over time and TCs in general arebecoming a taken-for-granted norm for transitioning states, there should be an equalization of interestrates being offered to emergent regimes with TCs. The voluntary TC signal becomes too noisy toprovide useful information to lenders about the type of regime that has emerged from the transition (asdiscussed in Section 1), and thus both good and bad regime types recieve the same terms of lending.

4 Better Terms of Lending: Empirical Evidence

I argue that transitioning states with voluntary TCs have received better terms of lending from theinternational community than those states without voluntary TCs, but that this difference has slowlyequalized over time. I look at all states that have had a transition in the period from 198957 up until200658, giving a universe of cases that involve 58 states in an unbalanced panel data set where the unitof analysis is Country-Year. The sample of cases (for most cases) includes both pre- and post-transitionyears. The definition of a transition is taken from the database compiled by David Backer59. Therewere three cases that I dropped from the universe, these were East Germany, Afghanistan and Iraq.East Germany was dropped because data on terms of lending do not exist for this state after 1989,since it technically ceases to exist. Iraq and Afghanistan were dropped because the transition processis in progress and ill-defined.

571989 is used as a starting point partly to avoid issues associated with strategic lending during the Cold War, andbecause much of the data is significantly easier to access from this time forward

582006 is the last year for which most data is available.59This can be found in D. Backer, “Cross-National Comparative Analysis.” In Audrey Chapman, Hugo van der Merwe

and Victoria Baxter eds., Assessing the Impact of Transitional Justice: Challenges for Empirical Research, Washington,DC: USIP Press, 2006.

13

4.1 The Data

The dependent variable is a measure of the terms of official lending; in this case, I use the averageyearly official interest rate for all bilateral and multilateral loans that a state receives. In looking at anaverage rate across both bilateral and multilateral loans, it is thought that any potential bias associ-ated with strategic lending60 could be minimized. Figure 1 shows the average official interest rate foreach country in the study over the period 1989- 2006. There is considerable variation across countries(and across time, though not to such an extreme extent), in the average official interest rate they arerecieving from multilateral and bilateral donors.

The main independent variable of interest is voluntary TC, which is coded as dummy variabletaking the value of zero for every year prior to having a voluntary TC, and a one thereafter. Somemodels also use a more general TC dummy variable to capture effects of both mandated and voluntaryTCs. The data on TCs were compiled from David Backer’s database, and cross-checked with the TruthCommissions Digital Collection at the US Institute for Peace61. A voluntary truth commission wasdefined to be one where the government of the transitioning state decided independently of externalforces such as the UN or international NGO’s to set up this institution. For example, under this codingscheme, Rwanda’s truth commission of 1992-1993 is non-voluntary since it was conducted at the behestof four major international NGOs, whilst the South African one was voluntary. Table 2 shows theuniverse of TC cases in the data set, the type of TC and year it was initiated, and also the type andmanner of transition.

The literature on international lending suggests a number of political and economic variables tobe controlled for. In terms of political factors, lenders might lend at more favorable rates to moredemocratic states, as posited by the regime type story of North, Weingast and Schultz. Thus, a level ofdemocracy variable is included; this is the Polity measure taken from the Polity IV data set. Lendersmight be ‘instability-averse’; this is proxied by a dummy variable for violence, taking a value of 1 forevery year that there is violence in a state, and a zero otherwise. This data is obtained from Fearon andLaitin62. It might be argued that creditors with a strategic interest in a country will lend to them atmore favourable rates - I use a ‘resource wealth’ dummy to control for strategic interests63. This datacomes from the Fearon and Laitin data set on Civil Wars64. A control for Human Rights is included; thePhysical Integrity Rights index from the Cingranelli and Richards (CIRI) Human Rights Data Set; theanecdotal evidence in Section 1 suggests that lenders would lend at more favorable terms to countrieswith better human rights practices.

In terms of economic factors, lenders might lend more favourably to those states that are potentiallybetter able to repay their loans 65,thus, a control for the level of economic development is included;

60This bias could arise from either multilateral loans (such as those from the IMF or World Bank) or bilateral loans61http://www.usip.org/library/truth.html62J.Fearon, D.Laitin, “Ethicity, Insurgency and Civil War”, American Political Science Review 97:1, 200363Whether this accurately captures strategic interests is obviously open to debate; in using resource wealth I am following

the literature on foreign aid, where it has been argued that resource wealthy countries receive more aid than resource poorcountries since they may be more strategically important

64The data comes from research done in J. Fearon and D. Laitin, “Ethnicity, Insurgency and Civil War”, AmericanPolitical Science Review, Volume 97, 2003

65B.S.Frey, and F.Schneider, “Competing Models of International Lending Activity”, Journal of Development Eco-

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15

Table 2: The universe of Truth Commision cases under examination, including the type of transitioneach case was coded, and how the transition occured.

Country Truth Commission Transition Type: MethodBurundi Mandated, 2004 Civil War: Negotiated Settlement

Central African Republic Voluntary, 2003 One Party State: Military CoupChad Voluntary, 1992 One Party State: Military CoupDRC Mandated, 2003 Civil War: Negotiated Settlement

Ecuador Voluntary, 1997 Military Dictatorship: HandoverEl Slavador Mandated, 1992 Civil War: Negotiated Settlement

Ethiopia Voluntary, 1994 One Party State: Internal PressureGhana Voluntary, 2002 Military Dictatroship: Handover

Guatamala Mandated, 1996 Civil War: Negotiated SettlementHaiti Voluntary, 1994 Military Dictatorship: External Pressure

Indonesia Voluntary, 2000 Military Dictatorship: HandoverLiberia Mandated, 2006 Civil War: Negotiated Settlement

Nepal Voluntary, 1994 One Party State: Internal PressureNigeria Voluntary, 1999 Military Dictatorship:?

Panama Voluntary, 2002 Military Dictatorship: External PressureParaguay Voluntary, 2003 Military Dictatorship: Military Coup

Peru Voluntary, 2001 One Party State: PressureRwanda Mandated, 1993 Military Dictatorship/Civil War: ?

Sierra Leone Mandated, 2002 Civil War: Negotiated SettlementSouth Africa Voluntary, 1995 Autocracy (Appartheid): Hand Over

Log GDP per Capita. The data is taken from the World Development Indicators online. The termsof lending might also be worse for countries that are more highly indebted to creditors; the generalargument being that the higher the level of indebtedness, the higher the probability of default on a loan,and thus the higher risk to the creditor66. This is controlled for by the level of official commitments asa percentage of gross national income; data comes from the Global Development Finance online database.

I include ‘time’ as an independent variable, since I am particularly interested in the interactiveeffects of time and having a voluntary TC.

A control for the type of transition that occurs is included; I categorize the universe of transitions tobe one of five classes; Pre-transition phase, Communist transition (all former Eastern bloc and Sovietstates), Civil war transition (for example Guatamala), Military Dictatorship transition (for exampleNigeria), and Autocracy or One-party transition (those cases that aren’t military states, for example,South Africa). Each transition type is treated as a dummy variable, taking the value of zero in all yearswhere the transition class did not apply, and a one for all years when the transition class did apply.The pre-transition phase is taken as the baseline case.

nomics, Volume 20, 1986.66Alvarez-Plata and Bruck 2006, Brewer and Rivoli 1990, Frey and Schneider 1986

16

Obviously I have not exhausted the full range of control variables that could potentially explainthe interest rate for transitioning countries, however, after reviewing the literature on lending, I believethat I have captured the critical controls necessary to draw some plausible conclusions. Table 3 belowprovides some summary statistics on the measures that are used in the analysis.

Table 3: Summary statistics for the main variables used in the analysis. Standard deviations are givenin parentheses.

Overall Mean Mean for Voluntary TC Mean for all other casesAverage Official Interest Rate (%) 2.81 2.02 2.91

(2.38) (2.06) (2.40)Democracy (Polity Score) 2.21 3.87 1.99

(6.00) (4.59) (6.13)Human Rights (PIR) 4.13 3.35 4.23

(2.24) (1.86) (2.27)Log GDP/Capita 2.81 2.71 2.83

(0.48) (0.50) (0.48)Official Commitments/GNI (%) 3.58 2.57 3.71

(5.03) (2.82) (5.24)

A simple two-sided t-test on the difference in means of interest rate for voluntary TCs vs. othercases lets us overwhelmingly reject the null hypothesis that they are equal. A one-tailed test allows usto accept the alternative hypothesis that the mean interest rate for country-years with voluntary TCsis significantly lower than for country-years without voluntary TCs67. Also interesting to note is thehigher mean level of Democracy for voluntary TC country years, but the lower level of mean log GDPper Capita and official commitments as a percentage of GNI.

Table 4 shows the contemporaneous correlations between the main explanatory variables of interestin the analysis; note the negative correlation between the Interest Rate variable and the TC variables.The negative correlation between Human Rights (as defined by the PIR index) and the TC variables,while at first seemingly counterintuitive, is less surprising if we consider that those countries adoptingTCs have worse human rights records than those that do not adopt TCs (for example, Guatamalavs. Poland). The negative correlation between Violence and Interest Rate suggests (if we accept thatviolence taps in to political stability), that unstable countries may recieve better terms of lendingthan stable ones. In light of the evidence gathered from the World Bank and other sources regardingtheir concern for trying to achieve stability first and foremost, perhaps it is the case that the negativecorrelation is reflective of a normative concern on the part of the lenders. I will, however, try to convincethe reader otherwise.

67For the two-sided test, the t-statistic was -4.2292 with a p-value of 4.018e-05

17

Table 4: Correlations betwen the variables used for analysis.

I.R Dem TC VoluntaryTC LogGDP/Cap Commit/GDP PIR Resource ViolenceI.R 1.00

Dem 0.17 1.00TC −0.07 0.14 1.00

Voluntary TC −0.13 0.10 0.82 1.00LogGDP/Capita 0.57 0.35 −0.09 −0.09 1.00

Commit/GDP −0.04 −0.06 −0.06 −0.08 −0.32 1.00PIR 0.20 0.45 −0.13 −0.15 0.35 −0.04 1.00

Resource 0.11 −0.29 −0.12 −0.08 0.12 −0.08 −0.17 1.00Violence −0.11 −0.17 0.02 0.05 −0.18 −0.02 −0.54 0.11 1.00

4.2 Statistical Analysis

In any time-series cross-sectional data analysis, it is always of interest to know exactly how muchof the variation is cross-sectional, and how much is temporal? Running naive regressions on the datareveals that 50.6% of the variation in average official interest rate is attributable to cross-sectionalvariation alone, whilst about 6% of the variation is attributable to the progression of time. Whenanalysing any statistical model, it is thus imperative to ask how much more explanatory power do weget from including our independent variables and controls?

I estimate an ordinary least squares model with a lagged dependent variable for two reasons. The-oretically, it is clear that interest rates are at least somewhat sticky and thus today looks somethinglike yesterday. From a methodological viewpoint, there is significant contemporaneous correlation inthe residuals68 when a lagged dependent variable is not included69.For Country i at time t, the main statistical model of interest is given by

yi,t = β1yi,t−1 +β2TCvoluntary(i,t−1) +β3time+β4TCvoluntary(i,t−1) ∗ time+βcontrolsi,t−1 +αi+εi,t (9)

where yi,t is the average official interest rate for Country i at time t. Furthermore, there is an interactiveterm between the TC voluntary dummy variable and time, to capture the changing effects of havinga voluntary TC over time. I include fixed effects for Country (αi)70 and use robust standard errorsclustered by country in order to mitigate problems caused by group-wise heteroskedasticity, and lackof independence in the data within each country clustering. I use lagged independent variables andcontrols assuming that a change in any of these variables will not bring about an instantaneous changein interest rate charged71. For example, if we assume that loans and loan conditions cannot immediatelybe negotiated and are based on cumulative past information, a state’s decision to implement a TC wouldostensibly influence the next ‘round’ of negotiations over loans. Similar reasoning holds for the other

68A Durbin-Watson test on the preferred model without a lagged dependent variable yielded a test statistic of 1.637136with corresponding p-value too close to zero to call.

69See N. Beck and J.N.Katz, “Time-Series-Cross-Section Issues: Dynamics, 2004”, available athttp://www.nyu.edu/gsas/dept/politics/faculty/beck/beckkatz.pdf, for a discussion of the econometric effects ofincluding a lagged DV rather than using a GLS correction of AR(1) errors

70Fixed effects for country are included because of the significant contribution they make to explaining variation inaverage official interest rate

71See Thacker, Brewer and Rivoli, Lebovic and Voeten for similarly conducted studies.

18

key predictors.I also estimate models that include both the general TC variable and the voluntary TC variable in

order to assess the differential impact they have on average official interest rate. That is, what is theeffect of having a TC on interest rates, controlling for whether or not the TC was voluntary.

In order to address the debate about the short-term versus long-term impact of an event (in thiscase of having a TC) on the outcome of interest (the average official interest rate), I estimate modelswith a difference term for voluntary TC and for TC as well. This is a form of the ‘error correctionmodel’; a model that directly estimates the rate at which the dependent variable returns to equilibriumafter a change in the independent variables. The model implies that the behavior of the dependentvariable is tied to the independent variables in the long run and that short run changes in the depen-dent variable responds to deviations from that long run equilibrium72. These results can all be seen inTable 5. Please note that results should be interpreted as being relative to a pre-transition phase, andfurther, that the base-line country is Albania.

The inclusion of 12 or 13 additional explanatory variables adds about 12% to the variation explained,over and above that explained by the naive regression of average official interest rate on Country. Table6 shows the percentage of extra variation in interest rate explained by the inclusion of select explanatoryvariables. We can see that including lagged interest rate, TC, Voluntary TC, time and a Voluntary TCinteraction accounts for an extra 11.75% of the variation in interest rate; this is almost all the extravariation explained by any of the above regressions. Furthermore, in this ‘simpler’ regression, all of thevariables are statistically significant in the expected direction.

In all three models presented in Table 5, we see that the overall impact of having a voluntary TCon average interest rate is negative and statistically significant, but that as time goes on, the marginaleffect on interest rate is decreasing. This relationship seemingly fits the argument about less effectivesignaling presented above, and can be seen in Figure 2.

The long-term impact of having a voluntary TC on interest rates can be determined from

Impact =βVoluntary TC + βVoluntary TC*time ∗ time

1 − βIRt−1

(10)

Based on the results in column one of Table 5, the long-term impact of having a voluntary TC variesover time as shown in Figure 3. Thus, the long term decrease in interest rates that is associated withimplementing a voluntary TC was -0.896% in 1989, but this has reduced to 0.039% by 1999, and resultsin an increased long term impact of 0.87% by 2006. Using the results of column two of Table 5, thelong-term impact of having a non-voluntary of TC is to increase the average official interest rate by0.46%. The short-term impact of having a voluntary TC (i.e. the effect of having a step-change inthe voluntary TC variable) is statistically indistinguishable from zero, as evidenced by the results incolumn three of Table 5.

72Time Series Models Notes, http://homepages.nyu.edu/%7Emrg217/homepage.htm

19

Table 5: Results of the three main regression analyses. Robust standard errors clustered by countryare given in parentheses. Country specific coefficients are unreported. Model One includes VoluntaryTC only, model two has all TCs controlling for voluntariness, and model three acounts for short-termimpacts.

(1) (2) (3)

Intercept 0.59 0.56 0.26(1.3) (1.44) (1.62)

Lagged Interest Rate 0.23 0.22 0.25(0.04) (0.04) (0.04)

Democracy −0.02 −0.02 −0.01(0.02) (0.02) (0.02)

Human Rights 0.07 0.06 0.06(0.04) (0.04) (0.04)

TC 0.36(0.24)

Voluntary TC −0.77 −1.11 −0.93(0.42) (0.48) (0.43)

Time −0.13 −0.13 −0.14(0.02) (0.02) (0.02)

Voluntary TC x Time 0.08 0.08 0.09(0.03) (0.03) (0.03)

∆ Voluntary TC 0.07(0.39)

Log GDP/Capita 0.24 0.27 0.38(0.50) (0.51) (0.57)

Commitments:GNI −0.01 −0.01 −0.03(0.01) (0.01) (0.01)

Communist Transition 1.65 1.66 1.68(0.16) (0.16) (0.17)

Civil War Transition 1.06 0.96 1.03(0.25) (0.22) (0.25)

Military Dictatorship Transition 0.62 0.59 0.58(0.25) (0.25) (0.30)

Autocracy Transition 0.23 0.25 0.28(0.35) (0.36) (0.36)

Violence −0.20 −0.17 −0.29(0.17) (0.17) (0.17)

Resources 0.42 0.41 0.34(0.54) (0.52) (0.52)

r2 0.6225 0.6225 0.6318

20

Table 6: Percentage of extra variation (over and above that explained by naive regression on fixedeffects for Country alone) explained by the inclusion of different explanatory variables.

Variable(s) % of extra variation explainedLagged interest rate 7.87

Voluntary TC 1.7TC + VoluntaryTC x time 8.7

Lagged interest rate + TC + VoluntaryTC x time 11.15

Figure 2: The marginal effect of having a voluntary TC on interest rate, over time. 95% confidencebounds are overlayed.

Marginal Effect of Voluntary TC on Interest Rate over Time

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Transitions from both civil war and military dictatorships result in statistically significantly higheraverage official interest rates than the pre-transition phase, and other types of transitions. Also, vi-olence is negatively and significantly correlated with average official interest rate; this might seemcounterintuitive at first, but is actually in line with the World Bank’s Post Conflict and Fragile StatesInitiative. The World Bank does what it can to ensure that there is first and foremost a cessation ofviolence - this includes concessional lending to relevant states73.

4.3 Robustness Checks

Closer examination of the preferred regression model shows that there is no discernible pattern in theresiduals for any particular country (as seen in Figure 4), suggesting the model fits the data reasonablywell. Additionally, the Q-Q plot of the residuals showed that they are distributed approximatelynormally.

73Interview, 14th March 2008, Media Manager for World Bank

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Figure 3: The Long Term Impact of having a Voluntary TC, over time.

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Long−term Impact of Voluntary TCs on Interest Rate

I argue that lagged IVs are used because it is theoretically more plausible that interest rates at timet would not respond immediately to a change in any of the explanatory variables. Nonethless,if contem-poraneous variables are used, we should still expect that the main results hold (at least in terms of thedirection of the relationships, if not the statisitcal significance). This is in fact the case when the sameregressions were run using contemporaneuos IVs. For the case of model (2) from Table 5 when con-temporaneous IVs are used, the adjusted R squared is slightly higher than the lagged IV case, at 0.6414.

For thoroughness, statistical analyses using fixed-effects for year, and a quadratic time trend wereconducted. The quadratic time trend allows increased flexibility in the relationship between adoptingTCs and the course of time, whilst fixed effects for year allows the most flexibility for this relationship.My argument has little to say about what should happen in the case of fixed effects; it turns out thatin this case, the direction of the relationship between voluntary TCs and interest rates is still negative,but the strength of the relationship is not statistically significant. This is also true when a generalTC variable is included and then voluntary TC is controlled for. This may be cause for some concernor at least for thought; the most flexible specification accounting for time negates the significance ofvoluntary TC.

The quadratic time-trend, however, produces similiar results to the linear time-trend case wereobserved, summarized in Table 7. When the time trend was interacted with the general TC variable, avery strong relationship is seen; at first, a much lower rate of interest to all countries with any form ofTC, but this rate increases as time goes on. The time variable was scaled so that integer values wereestimated to two decimal places for coefficients, rather than having an estimate of zero.

The marginal effect of having any kind of TC as a function of time (with the quadratic relationshipestimated in model 3), is shown in Figure 5.

22

Figure 4: The Country-by-Country residuals from the Regression of Interest Rate on the VoluntaryTruth Commissions over Time.

Residuals: Effect of Voluntary TC over Time

Time

Res

idua

ls

−505

5 10

Albania Angola

5 10

Armenia Azerbaijan

5 10

Belarus Benin

5 10

Bosnia/Herzogovina Bulgaria

Burundi CAR Cambodia Cameroon Chad Congo CotedIvoir

−505

Croatia−5

05

DRC Ecuador ElSalvador Ethiopia Georgia Ghana Guatamala Haiti

Hungary Indonesia Kazakhstan Krygistan Latvia Liberia Lithuania

−505

Macedonia−5

05

Malawi Mali Moldova Mongolia Mozambique Nepal Nicaragua Niger

Nigeria Panama Paraguay Peru Poland Romania Russia

−505

Rwanda−5

05

Serbia/MontenegroSierraLeone Slovakia SouthAfrica Tajikistan Togo Turkmenistan Ukraine

Uzbekistan

5 10

−505

Zambia

23

Table 7: Results from using quadratic time-trend for various combinations of voluntary and generalTCs, and using various forms of standard error correction. Model one uses country clusetered standarderrors, model two uses robust standard errors but not clustered by country, and finally model threeinvestigates a time trend on the general TC variable with country clustered standard errors.

(1) (2) (3)

Intercept 0.49 0.49 0.62(1.76) (1.89) (1.77)

Lagged Interest Rate 0.25 0.25 0.25(0.04) (0.05) (0.04)

Democracy −0.01 −0.01 −0.02(0.02) (0.02) (0.02)

Human Rights 0.06 0.06 0.06(0.04) (0.04) (0.04)

TC 0.01 0.01 −2.410.53 (0.36) (1.00)

Voluntary TC −1.79 −1.79(1.27) (1.04)

Time/1000 −159.00 −159.00 −180.00(79.30) (60.10) (80.00)

Time Squared/1000 1.01 1.01 1.01(3.60) (3.50) (3.60)

Voluntary TC x Time/1000 250.00 250.00(225.82) (225.80)

Voluntary TC x Time Squared/1000 −6.50 −6.50(9.23) (9.23)

TC x Time/1000 405.00(185.9)

TC x Time Squared/1000 −145.60(7.76)

Log GDP/Capita 0.33 0.33 0.31(0.58) (0.65) (0.58)

Commitments:GNI −0.03 −0.03 −0.02(0.01) (0.01) (0.01)

Communist Transition 1.71 1.71 1.73(0.21) (0.37) (0.21)

Civil War Transition 1.04 1.04 0.99(0.33) (0.33) (0.28)

Military Dictatorship Transition 0.66 0.61 0.62(0.27) (0.33) (0.27)

Autocracy Transition 0.30 0.30 0.34(0.36) (0.33) (0.36)

Violence −0.24 −0.24 −0.20(0.20) (0.19) (0.18)

Resources 0.33 0.33 0.31(0.52) (0.38) (0.52)

r2 0.631 0.631 0.6313

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Figure 5: The marginal effect of having any form of TC on interest rate, over time for a quadratic timetrend. 95% confidence bounds are overlayed.

Marginal Effect of TC's on Interest Rate over Time

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I also recoded the TC variable to account for only those Country-Years whereafter the TC hadreleased its report, since not every TC did so. This was mainly done as a check that the results didnot hinge on a particular choice of coding. The results remained substantively similar in this case.

4.4 The reputational spill-over mechanism

The reputational spill-over mechanism is perhaps hardest to assess directly; knowing with certaintythat a government adopted a TC voluntarily because it cared about its reputation would best be donethrough case studies. The main results regarding the difference between voluntary and mandated TCsand the trend over time, does however provide some support for a spill-over effect. If it is the casethat a country that voluntarily adopts a TC is seen to be committed to reform in the areas of humanrights and democratization, its actions in these areas are taken as an indication of its regime type. Thiscasting of type cuts across subject areas into the realm of international lending; a good type of regimeis rewarded with lower interest rates. An obvious question to ask at this stage is; is an emergent regimethat adopts a voluntary TC more committed to reform in the areas of human rights and democracy?

To test whether having a voluntary TC affects human rights practices of a state, an ordered probitmodel was used to regress Human Rights on Democracy74, Log GDP/Capita75, a voluntary TC dummy,and a political stability dummy. The results are shown in Table 8.

74Refer to C. Davenport and D. A. Armstrong II, “Democracy and the Violation of Human Rights: A StatisticalAnalysis from 1976 to 1996”, American Journal of Political Science 48:3, 2004, for a discussion of the relationship betweenregime type and human rights

75Refer to N. J. Mitchell and J. M. McCormick, “Economic and Political Explanations of Human Rights Violations”,World Politics 40:4, 1988, for a discussion of the relationship between economic development and human rights

25

Table 8: The effect of voluntarily implementing a TC on Human Rights. Country clustered standarderrors are given in parentheses.

CoefficientVoluntary TC Lagged 0.14

(0.18)Democracy Lagged 0.07

(0.01)Log GDP/Capita Lagged -0.63

(0.34)Violence Lagged -1.06

(0.12)Intercepts

0—1 -5.32(1.07)

1—2 -4.50(1.06)

2—3 -3.91(1.06)

3—4 -3.261.06

4—5 -2.42(1.06)

5—6 -1.521.06

6—7 -0.511.06

7—8 0.86(1.06)

Residual Deviance 2690.311AIC 2828.311

Both Democracy and Stability are statistically significantly correlated with the level of human rightswe are expected to see in a country. Holding all other variables constant, an increase in democracy willpositively affect the probability of being in a particular category for level of human rights. Similarly,going from a state of non-violence to a state of violence will negatively affect the predicted probabilityof being in a particular category of human rights. The model is not a particularly good fit to the data,with a 34.77% correctly predicted rate; this is compared with 18.12% correctly predicted from a nullmodel. In any case, it seems that implementing a TC voluntarily does not significantly alter the humanrights practices of a country.

The relationship between Democracy and voluntarily implementing a TC is tested using ordinaryleast squares regression. Human Rights, Log GDP/Capita76, Political Stability, and a voluntary TC

76See A. Przeworski, M.E.Alvarez,J.A.Cheibub, and F. Limongi “Democracy and Development”, Cambridge UniversityPress, 2000, for a discussion of the relationship between democracy and economic development

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dummy are the key independent variables. Country fixed effects are also included to soak up thegroupwise heteroskedasticity. The results of three different cases are shown in Table 9, with stan-dard error clustered by Country. The fit of the models should be compared to baseline cases with anR squared of 0.6655 for country fixed effects only, and an R squared of 0.06659 for year fixed effects only.

Table 9: The effect of voluntarily implementing a TC on Democracy. Standard errors are given inparentheses. Model one uses fixed effects for year, model two uses a linear time trend and looks atthe affect of voluntary TCs only, and model three, also using a linear time trend looks at general TCscontrolling for voluntariness.

(1) (2) (3)

Intercept 1.28 5.18 4.27(3.71) (3.35) (2.90)

Voluntary TC Lagged 0.32 6.11 3.96(1.14) (1.84) (1.73)

TC Lagged 3.07(0.90)

Time 0.29 0.25(0.05) (0.05)

TC voluntary x Time −0.41 −0.41(0.13) (0.13)

Human Rights Lagged (PIR) 0.29 0.26 0.23(0.11) (0.10) (0.10)

Log GDP/Capita Lagged −0.57 −1.36 −0.86(1.11) (1.07) (0.88)

Violence Lagged 0.26 0.47 0.67(0.77) (0.75) (0.73)

r2 0.7694 0.768 0.7761

Note that model three, using a time trend for the effect of voluntary TC on Democracy, providesthe best fit, and further, that the gap in the effect of voluntarily implementing a TC and mandatedTCs, or having no TC at all, on Democracy is decreasing over time. This shows a similar pattern tothe effect of voluntary TCs on interest rate; one might suspect that the relationship between voluntaryTCs and Democracy is highly multi-collinear but the correlation between the two variables is a modest0.19. Figure 6 shows the marginal effect of having a voluntary TC on democracy over time.

The above analyses provides mixed results for the effect of voluntary TCs in the areas in which Iargued that emergent regimes would be trying to build a good reputation. On the one hand it seemsthat volunatrily adopting a TC affects the level of democracy in a transitioning state, on the otherhand the same cannot be said with much confidence about its effect on human rights.

The causal arrow, however, may not be running from voluntary TC to democracy, but instead mightbe reveresed, as mentioned in Section 2. To test this, a logistic regression of the probability of adoptinga voluntary TC was run on human rights, democracy, political stability, and a measure of economic

27

Figure 6: The marginal effect of having a voluntary TC on democracy over time. 95% confidencebounds are overlayed.

Marginal Effect of TC's on Democracy over time

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development. Results are shown in Table 10; fixed effects for Country are not shown in the resultstable.

Table 10: Results for the Logit Model; what affects the probability of voluntarily implementing a TC.Country clustered standard errors are given in parentheses.

CoefficentDemocracy Lagged (Polity Score) 0.44

(0.09)Human Rights Lagged (PIR) -0.05

(0.17)Log GDP/Capita Lagged 15.83

(5.76)Violence Lagged 0.36

(0.72)

Democracy and Log GDP/capita are found to be statistically significantly correlated with theprobability of voluntarily adopting a TC. Starting with an initial probability of adopting a voluntaryTC of 0.5 (which corresponds to Xβ = 0), a one unit increase in Democracy as measured by thePolity Score, increases the probability of adopting a voluntary TC to 0.607, ceteris paribus. A 0.1 unitincrease in log GDP/capita results in a probability of adopting a TC voluntarily of 0.829. This givessome credence to the argument posited by Olsen et. al.77 that richer countries are more likely to adopt

77T.Olsen, L.A. Payne and A.G. Reiter, “At What Cost? A Political Economy Approach to Transitional Justice”,Under Review

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TCs voluntarily than their poorer counterparts. The overall fit of the model is assessed based on apercent correctly predicted measure - the model predicts 96.5% of country-years correctly. It gets the0’s right 98% of the time, and the 1’s right 85% of the time, with a classification threshhold of 0.5. Anull model for the data (i.e. one that fits no predictors, just ‘guessing’ the modal outcome) predicts87% of country-years correctly.

Based on this analysis, then, we cannot rule out the possibility that being more democratic (andostensibly moving more in this direction) increases the likelihood of adopting a voluntary TC.

5 Alternative Hypotheses

5.1 The Institutional Mechanism

The institutional mechanism relating how voluntary TCs may affect the level of interest rate positsthat voluntary TCs might affect the level of democracy in a state, and that the level of democracyaffects the interest rate a state must pay. The results of Section 4.4 lend at least some support to thefirst part of the causal chain; voluntary TCs have a positive impact on the level of democracy. Thesecond part of the hypothesis is tested by running an OLS regression of interest rates on the controlvariables outlined in Section 4.1, bar any of the TC variables. Both fixed effects for Year, and a lineartime trend interacted with Democracy, were investigated. The results from these analyses are shownin Table 11

In neither model is Democracy statistically significantly correlated with interest rate, though thedirection of the correlation is as expected. This casts some doubt as to the validity of the second partin the institutional mechanisms causal chain, and hence on the mechanism itself.

5.2 The Normative Mechanism

According to the normative mechanism, adoption of a truth commission is seen as a crucial processon the path to reconciliation, stability and democratization. If it were the case that internationallenders had this sort of commitment to the adoption of truth commissions, what would cause them todifferentiate between voluntarily adopted TCs and mandated ones, after all, they ostensibly achievethe same thing? Moreover, a normative commitment to TCs would imply that as more and morecountries adopt TCs because they are becoming mandated as an integral part of the transition process,we should be seeing a widening of the interest rate gap between countries that implement TCs, andcountries that do not. The main results of this paper, however, show firstly that there is differentiationbetween voluntary and mandated TCs, and that as more and more TCs are being implelemented, thegap between the two forms of TC is narrowing, as is the gap between voluntary TCs and no TC.Thus, preliminary analysis would suggest that the normative mechanism is inadequate for explainingthe trends in the data that are observed.

29

Table 11: The effect of Democracy on Interest Rates. Country clustered standard errors are given inparentheses. Model one uses fixed effects for year, and model two uses a linear time trend.

(1) (2)

Intercept −0.63 0.13(1.77) (1.68)

Interest Rate Lagged 0.27 0.26(0.04) (0.04)

Democracy Lagged −0.02 −0.02(0.02) (0.02)

Time −0.12(0.02)

Democracy*Time 0.00(0.00)

Human Rights Lagged (PIR) 0.06 0.07(0.04) (0.04)

Log GDP/Capita Lagged 0.44 0.39(0.59) (0.59)

Commitments:GNI −0.02 −0.02(0.01) (0.01)

Communist Transition 2.05 1.61(0.37) (0.16)

Civil War Transition 1.00 1.00(0.27) (0.28)

Military Dictatorship Transition 0.65 0.62(0.25) (0.25)

Autocracy Transition 0.27 0.29(0.34) (0.35)

Violence Lagged −0.17 −0.18(0.18) (0.18)

Resources 0.32 0.330.56 (0.59)

r2 0.6414 0.6302

6 Conclusion and Future Work

I present an argument about the effect of implementing TCs on the terms of borrowing for transition-ing countries based on two broad puzzles in the international relations and transitions literature. Thefirst pertains to why some countries adopt transitional justice mechanisms - TCs in particular, in theaftermath of transitions, whilst others do not. The second puzzle pertains to the general determinantsof the terms of international lending, in particular after transitions.

I argued that the voluntary adoption of a TC served as a costly signal by the emergent regime thatit was a good type, committed to reform in the areas of human rights, democratization and politicalstability. I further argued that by undertaking this TC process, an emergent regime would build areputation for itself that would spillover into the arena of international debt. Lenders face uncertainty

30

about the type of regime they face in the aftermath of transitions and how likely these regimes are torepay their loans. They do however observe actions such as voluntarily adopting TCs and can updatetheir beliefs about regime type based on this information. Good types of regimes are rewarded withbetter terms of lending. I also proposed two other mechanisms which might connect the action ofadopting a TC to the outcome of lower rates of interest; a normative mechanism and an institutionalmechanism. The empirical work aimed at supporting the reputational spill-over story over either of theother two mechanisms.

I envision the next steps of this project proceeding along two parallel paths. One path would aim tolook more closely at the lending aspect of the thesis by doing case studies using multilateral institutionslending data for specific countries. Conducting more interviews with these lending institutions to gagethe determinants of lending to transitioning countries would also be a priority. In terms of empiricalwork, in order to more rigorously test the reputational spill-over mechanism, I would propose to lookat lending by private investors. If it is the case that a state’s reputation in the areas of democracy,human rights and stability spill-over in to the area of lending, then this effect should be picked up byprivate lenders also.

The second and parallel path would be to do some in depth case studies of countries that voluntarilyadopted TCs, and ones where TCs were mandated. In the former instances, case studies would serve togain leverage into the reasoning behind the adoption of the TC and the specifics of the TC (its mandate,publicity and support). In the latter instance, case studies would serve to highlight the features ofthose transitioning states that makes mandated TCs necessary. In both cases, looking in more detailat the countries’ political and economic institutions could lead to a more nuanced understanding of itsdebt repayment strategies. I also propose to do field work in a select number of ‘transitioned’ states.Interviewing not only the elite who made the final decisions on adopting TCs, but also those whoparticipated in the process and the general public would provide valuable insight into both the criticalquestions regarding TCs in the transitional justice field; under what circumstances do some countriesadopt TCs, and what are the consequences of adopting them?

31