Evaluating debt relief:challenges and results

EADI/DSA Conference

York, 19-22 September 2011

Geske Dijkstra

Erasmus University Rotterdam

dijkstra@fsw.eur.nl

Most debt relief is ODA

Measuring the fffect of debt relief on growth: overview

• Comparison of methods:– Theory-based evaluation– Econometrics

• Strengths and weaknesses of methods

• Comparison of results

• Conclusion

What is debt relief?

Relief on sovereign debts provided by official creditors:

• On debt service (flows) or on debt stocks

• Rescheduling versus cancellation• Type of creditor:

– Bilateral: aid loans or export credits (“commercial”)

– Multilateral– Private

Theory

• A high debt may affect growth through:– A large and (partly) not serviced debt stock,

leading to a debt overhang that hampers capital inflows, investment, and incentives for policy reforms

– A large flow of debt service payments that reduces government physical and social investment

Debt overhang:The debt Laffer curve

Debt

Expected debt payments

O

A

B

45°

growthEconomic Impact

Flow effects: government investment

Stock effects: creditworthiness, private investment

Outcomes

Policy changeIncrease in flow of resources

Reduction of debt stock

Outputs

Policy conditions

modalitiesDifferentInputs

ConditionalityFlowStock

Theory-based evaluation

Examples

• Dijkstra 2008: Evaluation of debt relief to 8 countries 1990-1999:– Bolivia, Jamaica, Nicaragua, Peru– Mozambique, Tanzania, Uganda, Zambia

• IOB 2010 Evaluation of 2005 debt relief to Nigeria

EconometricsDepetris Chauvin and Kraaij 2005, Presbitero 2009

• NPV debt reduction as result of forgiveness and concessional reschedulings

• 62 LICs• 1989-2003, 2006• Effect on growth,

government spending, investment,

• Difference-in-difference

Johansson 2010

• NPV debt reduction plus market value of debt reduction, stock and flow effect

• Panel of 118 countries• 1989-2004• Effect on growth,

investment• Standard growth

regression with GMM

Criteria for comparison of methods

• Validity of debt relief measures

• Validity of causal relationship: attribution

• Potential for assessing channel of influence

• External validity

Criterion Theory-based evaluation

Econometrics

Validity of measuring DR

Good Limited

AttributionImpact via theory; outputs better than outcomes

Good but robust results difficult due to small impact

Channel of influence

Good Good for stock; limited for flow and conditionality

External validity

Limited, better with many case studies

Good

Comparison of resultsStock Flow Conditionality Growth

Bolivia + + 0 +

Jamaica + + 0 +

Nicaragua 0 0 0 0

Peru ++ 0 0 +

Mozambique 0 0 0 0

Tanzania O 0 0 0

Uganda O 0 0 0

Zambia O 0 0 0

2005 Nigeria + 0 ++ +

Depetris 0 0 NA, + 0

Presbitero 0 NA NA 0

Johansson 0 0 NA 0

Conclusions

• Strengths theory-based evaluation: measuring debt relief, effect of different modalities, channels of influence

• Strengths econometrics: attribution, external validity

• Results are similar: limited effects