Debt Relief in poor countries

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1 Debt Relief in poor countries Was the HIPC Initiative successful? Andrea F. Presbitero E mail: a.presbitero@univpm.it Pagina web: Università Politecnica delle Marche - Dipartimento di Economia MoFiR and CeMaFiR Novara, 11 Novembre 2008 What has 100 billion dollars worth of debt relief done for Low Income countries? Depetris Chauvin and Kraay, 2005 This initiative (HIPC) is a breakthrough... It deals with debt in a comprehensive way to give countries the possibility of exiting from unsustainable debt. It is very good news for the poor of the world World Bank President, James D. Wolfensohn The danger is that Gleneagles declaration may amount to a Pyrrhic victory: a symbolic win for advocates of debt relief that clears the conscience of the rich countries, but leaves the real problems of the poor countries unaddressed Serken Arslanalp and Peter B. Henry

2 1 Introduction The debt crisis and the first responses Rationale for debt relief 2 The HIPC Initiative Relevance and targets Policy design Results and Criticisms Debt relief effectiveness 3 After the HIPC... The MDRI The role of donors The debt crisis and the first responses External financing to poor countries For decades, concessional lending (loans provided to poorest countries with lower interest rates and longer repayment periods than typical or standard market or multilateral loans) has been an important element of international assistance to developing countries. Poor countries were not sufficiently creditworthy to attract commercial lending. Hence, they had to rely on official finance, which comes as bilateral (export credit and ODA) and multilateral concessional loans. Many countries built up large amount of external public debt, because of worldwide (oils shocks, commodity prices, interest rates) and domestic (deficits, wars, poor governance) factors. Despite these favorable terms, many poor countries have had increasing difficulty making payments on their debts, mainly because they have not grown as rapidly as had been hoped.

3 The debt crisis and the first responses The crisis Beginning in the late 1980s, when the stock of debt became potentially unmanageable, the Paris Club (an informal group of official creditors, industrial countries in most cases) started providing progressively easier repayment terms for poor countries struggling with their debts and implementing policies to increase growth. Increasingly concessional relief was provided on countries existing debt to fund policy reforms in the hope that these countries could grow their way out of trouble. Nevertheless, many countries continued to have problems and found themselves facing a debt service crunch. The debt crisis and the first responses Measures of indebtedness The main measures of external indebtedness are the ratios of external debt over GDP and over exports. The second ratio has the advantage of being more informative on the capacity of a country to generate enough foreign currency to meet its debt obligations, but is subject to the extreme exports volatility. Given the loans concessionality, debt is measured as Net Present Value (NPV) and not at its nominal value: The NPV of debt is the sum of all the future debt service obligations interest and principal on existing debt, discounted at market interest rates. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element. Debt service is scaled by government revenues or GDP.

4 The debt crisis and the first responses Evolution of external debt stocks External debt (% GDP) MDRI External debt (% Exports) HIPC E HIPC External debt (% GDP) External debt (% Exports) Source: World Development Indicators 2008 (The World Bank) The debt crisis and the first responses The International Community response In time, it became clear that countries repayment problems were not just temporary and that a more comprehensive solution was needed. In the Nineties, the Paris Club started to negotiate debt reduction programs, at first limited to debt repayment flows and, subsequently, expanded also to debt stock reductions. In 1996, debt relief programs were boosted by the Highly Indebted Poor Countries (HIPC) Initiative, launched by the World Bank and the IMF. In 1999, as a response to a number of criticisms raised by NGOs activists, the Initiative (now Enhanced HIPC) was modified in order to: 1 enlarge the number of countries potentially eligible for debt cancelation, 2 granting faster debt relief, and 3 create a stronger relationship between resources freed by debt relief and poverty reduction strategies.

5 Rationale for debt relief Debt and economic development Interest repayments The flow effects of debt on economic performance are due to the so-called Crowding Out of public investment: debt service discourages public investment (as well as social and health expenditures). Debt Stocks A large external debt negatively affect economic growth because of: Debt Overhang: large external debt is detrimental to economic growth since it discourages investments. In presence of debt overhang, excess debt acts as a distortionary tax, given that agents assume that a share of future output will be used to repay creditors. Uncertainty: macroeconomic instability reduces growth. Namely, investment decisions under uncertainty may not be forward looking: short term, low risk investments might be the preferred option. Rationale for debt relief Is there any debt overhang? Theory The theoretical argument was developed in response to the Latin American crisis of the 1980s, which affected MIC and debts contracted mainly with private creditors, while this debt crisis involves LICs without market access and highly dependant on concessional external lending. HIPCs keep on receiving net positive resource transfers which reduce the disincentive effect of external public debt. Besides, weak economic institutions and infrastructure are a major hindrance to investment. Evidence The debt-growth nexus clearly depends on the country-specific institutional framework: debt overhang is effective exclusively in countries with good policies and institutions. This result is consistent with recent studies estimating that debt relief is effective only in countries with sound institutions.

6 Rationale for debt relief The Debt-Growth Nexus and Institutional Quality 6 5 Weak institutions Medium institutions 4 ln(npv ExDebt/GDP) Strong institutions Total Real per capita GDP growth rate (unexplained part) ln(npv ExDebt/GDP) Linear fit Graphs by Institutional quality Notes: Different panels refer to countries with weak (CPIA 3.25), medium (3.25 < CPIA < 3.75) and strong (CPIA 3.75) policies and institutions, and to the overall sample. Source: Presbitero (2008) Rationale for debt relief Debt relief and moral hazard The moral hazard effect refers to the possibility that debt relief might induce debtors to believe that creditors have taken a softer stance and that they will be more willing to forgive any future debt, when the likelihood to obtain a repayment decreases substantially. Debtor moral hazard is based on the fact that countries could pursue over expansionary domestic policies recurring to external debt, on the expectations of a future debt cancelation by Multilateral Institutions. Creditor moral hazard is due to the fact that the expectation of debt reduction encourages private international capital markets to underestimate the risks associated with lending to individual countries or groups of countries and therefore to overlend (Bird 2007). Large amounts of debt reduction, as well as lower debt ratios, increases the capacity for new lending, attracting non concessional financing. In this case, debt relief could work as a subsidy to lenders offering non concessional loans, creating a free riding problem among creditors.

7 Relevance and targets The HIPC Initiative Targets The HIPC has two main targets: 1 reaching long-term debt sustainability 2 assuring poverty reduction. Elements of novelty 1 Debt owed to multilateral institutions, which represents a large share of total debt held by HIPCs, is included in debt reduction programs; 2 Debt relief is focused on debt stocks, which should be reduced up to a point low enough to reach debt sustainability. Relevance and targets Its relevance The Initiative was intended to resolve the debt problems of the most indebted and poor (originally 41 countries), with total debt nearing 200 billion USD. Currently, the HIPC Initiative covers 41 countries, mainly African, with a total population of more than 567 millions of people (in 2006), with half living on less than 1$ per day, with poor health condition (like expectancy is 49 years), low school enrolment rates and a widespread poverty. Per capita GDP in 2005, measured at current PPP, was just 1,371 USD, with many countries well below the 1,000 dollars threshold.

8 Policy design How it works Eligibility A country is considered potentially eligible for debt relief if the following conditions are satisfied: 1 It is IDA only and PRGF eligible. 2 Its end December 2004 debt burden indicators are above these thresholds: exports 150 percent for the ratio of the net present value of debt (NPV) to exports; revenues 250 percent for the ratio of NPV to fiscal revenue (for countries which have very open economies, i.e. exports to GDP ratio above 30 percent). 3 Establish a track record of reform and develops a Poverty Reduction Strategy Paper (PRSP) that involves civil society participation Policy design How it works Debt Sustainability Sustainability Debt solvency is maintained when current debt does not exceed the present value of future revenues, net of non-interest expenditures. Debt liquidity is maintained when liquid financial resources are large enough at any point in time to cover liabilities due. Debt serviceability implies solvency plus liquidity at any moment. The IMF World Bank DSA The debt sustainability analysis (DSA) is defined on debt serviceability on a case by case basis, depending on policies and institutional quality. A country can be considered to achieve external debt sustainability if it is expected to meet its current and future external debt-service obligations in full, without recourse to debt relief, rescheduling of debts, or the accumulation of arrears, and without unduly compromising growth.

9 Policy design How it works A two step procedure Decision Point Eligible countries can reach the decision point (DP) once they have a track record of macroeconomic stability and have prepared a Poverty Reduction Strategy Paper (PRSP). At this point (interim period), countries starts receiving interim relief on a provisional basis. Completion Point Once a country has maintained macroeconomic stability under the IMF s Poverty Reduction and Growth Facility (PRGF) program, implemented a PRSP and carried out structural and social reforms for at least one year, it can reach completion point (CP), which implies that the full amount of debt relief becomes irrevocable. Policy design How it works A two step procedure Review of the HIPC process Decision point requirements Floating completion point requirements Country fulfills HIPC Eligibility Criteria Preparation of an interim PRSP Satisfactory performance under PRGF Possible topping up determined on a case by case basis Pre-decision point Satisfactory performance under PRGF Interim period Conditional interim relief Implementation of PRSP for one year Meet Structural reform triggers Post-completion pt. Irrevocable debt relief

10 Policy design HIPC countries Completion Point NPV debt Decision Point NPV debt Pre Decision Point NPV debt Benin 112 Afghanistan n.a. Comoros 193 Bolivia 112 Burundi 1273 Cote d Ivoire 131 Burkina Faso 196 Central African Rep. 715 Eritrea 213 Cameroon 61 Chad 51 Kyrgyz Republic 106 Ethiopia 111 Dem. Rep. of Congo 383 Nepal 104 Gambia, The 162 Congo, Rep. 134 Somalia n.a. Ghana 64 Guinea 146 Sudan 358 Guyana 69 Guinea-Bissau 660 Togo 162 Honduras 60 Haiti 63 Madagascar 323 Liberia 3514 Malawi 162 Mali 100 Mauritania 289 Mozambique 85 Nicaragua 94 Niger 142 Rwanda 154 S. Tome & Principe 520 Senegal 89 Sierra Leone 178 Tanzania 95 Uganda 137 Zambia 80 NPV debt is the present value of external debt as a percentage of exports of goods and services Source: World Development Indicators, The World Bank, Policy design How it works The costs Potential Costs of the HIPC Initiative by Creditor Group Total estimated cost: US$71 billion, end-2007 NPV terms 1 IaDB $1.6 billion (2%) AfDB Group $5.1 billion (7%) IMF $6.1 billion (9%) Other Multilateral Creditors $5.4 billion (8%) Paris Club $25.5 billion (35%) World Bank $14.3 billion (20%) Commercial $4.0 billion (6%) Other Official Bilateral $9.1 billion (13%) 1 All 41 HIPCs Potential MDRI Debt-Service Savings by Creditor and Country Group In billions of US dollars, in end 2007 NPV terms IDA IMF AfDF IaDB Estimated MDRI Cost to all 41 HIPCs Cost of MDRI Delivered to 23 post-completion-point HIPCs Sources: Country authorities; and IDA, IMF, AfDB, and IaDB staff estimates 1 Preliminary estimates. IMF also provides MDRI debt relief of US$0.2 billion in end-2006 NPV terms to Cambodia and Tajikistan, excluded here Debt_Pocket_Fall08_CRA 9/24/08 11:05 AM Page 1

11 Results and Criticisms Evaluation Achievements 1 At September 2008, debt relief approved for 33 countries amounting to over $68 billion in nominal debt service relief (plus 49 under the MDRI) countries have reached CP and have been granted $44 billion in unconditional debt service relief (those countries qualify for the MDRI). 3 NPV of external debt of 33 approved HIPCs cut by approximately two thirds. 4 Social expenditures are increasing substantially. Poverty reducing spending amounted to nearly $15 billion in 2005 and is projected to rise from less than twice debt service payments in 1999 to more than five times. Results and Criticisms Evaluation Achievements HIPC Initiative and MDRI: Estimates of Debt Relief 1 End-2007 NPV terms, in billions of US dollars HIPC 14.3 WORLD BANK GROUP DEBT RELIEF TOTAL DEBT RELIEF MDRI HIPC and MDRI HIPC MDRI HIPC and MDRI All HIPCs 23 Post-Completion- Point HIPCs Interim HIPCs Pre-Decision-Point HIPCs Source: HIPC Initiative country documents; IDA and IMF staff estimates 1 Assumptions include timing of HIPC decision and completion points, and where applicable, of arrears clearance The debt stocks of the 33 post-decision-point HIPCs have been reduced by about 90 percent Debt stocks of the 33 post-decision-point HIPCs, in US$ billion, end-2007 NPV terms Before traditional debt relief 117 After traditional debt relief 95 After HIPC Initiative debt relief 44 After additional bilateral debt relief 39 After MDRI 13 Source: HIPC Initiative country documents; IDA and IMF staff estimates Debt_Pocket_Fall08_CRA 9/24/08 11:05 AM Page 5

12 Results and Criticisms Evaluation Achievements Debt indicators of HIPCs have substantially declined since NPV of debt-to-exports NPV of debt-to-gdp Debt service-to-exports NPV of debt-to-revenue Debt service-to-revenue 1 Data are simple averages; subject to data availability Poverty-reducing expenditure to government revenue Poverty-reducing expenditure to GDP 33 POST-DECISION-POINT HIPCs % 102% 128% 31% 19% 7% 556% 171% 22% 8% The HIPC Initiative and the MDRI have contributed to increased poverty-reducing expenditure in post-decision-point HIPCs % 9% Source: HIPC documents; IDA and IMF staff estimates 1 Subject to data availability 42% 47% Debt_Pocket_Fall08_CRA 9/24/08 11:05 AM Page 6 Results and Criticisms Evaluation Projected Achievements Debt service (% GDP) Projections Poverty reduction expenditures (% GDP) Debt service (% GDP) Poverty reduction expenditures (% GDP)

13 Results and Criticisms Evaluation One first criticism: a great heterogeneity Debt service (% GDP) Poverty reduction expenditures (% GDP) Congo, Rep. Guyana Guinea Bissau Mozambique Gambia Tanzania Guinea Bolivia Bolivia Ethiopia Sao Tome and Principe Nicaragua Guyana Rwanda Nicaragua Chad Mali Malawi Honduras Madagascar Ghana Sao Tome and Principe Chad Burundi Senegal Zambia Sierra Leone Ghana Haiti Senegal Congo, Dem. Rep. Niger Burkina Faso Mauritania Burundi Mali Zambia Congo, Rep. Mauritania Honduras Benin Cameroon Niger Gambia Mozambique Burkina Faso Malawi Uganda Ethiopia Guinea Bissau Rwanda Benin Madagascar Guinea Decision Point Cameroon Uganda Congo, Dem. Rep. Sierra Leone Decision Point 2007 Tanzania Haiti Results and Criticisms Evaluation Main criticisms Major drawbacks Thresholds based on historical data about Latin American crisis and not on any theoretical model of debt sustainability. Debt service burden is not considered, even if many countries spend a large share of their revenues to service their debt. Debt Sustainability Analysis DSA Based on the financial sustainability approach, excluding domestic debt: 1 Resources required for basic social spending are ignored. 2 Interest rates and other macro variables are taken as exogenous. 3 Relies on overly optimistic projection of GDP and exports growth.

14 Results and Criticisms The role of domestic debt and the DSF Domestic debt in poor countries is becoming a critical relevant element, largely ignored by the HIPC Initiative, since domestic borrowing was rather limited at the time the HIPC Initiative was launched. Over , the stock of debt almost doubled (18% of GDP). and domestic interest payments become the largest share (more than 2%) of overall interest expenditure. In 2005, the IMF and the World Bank approved the Debt Sustainability Framework, which recognize the relevance of domestic debt dynamics for total public debt sustainability. The DSF is based on three main pillars: 1 the determination of country specific debt thresholds, depending on policies and institutional quality 2 the evaluation of the impact on debt of external shock under a forward looking analysis of debt and debt service dynamics, and 3 the formulation of an appropriate borrowing and lending strategy that contains the risk of debt distress. Debt relief effectiveness Being realistic At September 2008 the committed debt relief under the HIPC Initiative amounted to 68 billions of US dollars in nominal terms. The MDRI added other 43 billions in assistance for the 23 post-cp countries, so that, in sum, HIPC and MDRI assistance amounts to USD 112 billions. To put these figures in perspective, consider that the estimated total cost of supporting the Millennium Development Goals (MDG) financing gap in all countries is around $121 billion in 2006, raising to $189 billion in 2015, while official development assistance was equal to USD billion in 2007 (95 billion without considering debt relief). At country level, the UN Millennium Project estimates that Uganda needs $33 billion to meet the MDGs over the period , which amounts, on average, to the 26% of GDP per year. Of this sum, 17 billions (13.7% of GDP) have to be financed through external budget support. The costs of funding the MDGs represent a similar share of GDP also in Ghana and Tanzania. By contrast, at September 2008, these countries received debt relief under the HIPC and MDRI programs only for a small share of their expected expenditures.

15 Debt relief effectiveness Is debt relief going to be effective? It is still early to have a conclusive answer, but: 1 the Bank and the Fund state that while poverty-reducing expenditures have increased and debt service payments has declined concomitantly, the impact of debt relief on attaining the MDGs has been hard to quantify. 2 it seems that debt relief did not enhance growth and investment (Chauvin and Kraay 2005 and Johansson 2008), as well as government spending on health and education; 3 there is a positive effect on domestic credit availability to the private sector (Harrabi et al. 2007) and on social services (public education and health) expenditures (Dessy and Vencatachellum 2007), but only in countries with good institutions. Recent data show that there is a weak association between changes in economic growth and debt relief in the previous period, while debt relief seems to be correlated with rising domestic debt and worse policies and institutions (at least for the outcomes in the period ). Debt relief effectiveness Debt Relief and Growth Change in real per capita growth rate between t and t GHA BOL BFA GMB BDI GUY HND UGA NIC MLI MRT ZMB BEN SLE NPL MWI TZA ETH GNB MDG MOZ CIV GIN TGO SEN COM CMRCOG CAF RWA TCD NER HTI SDN LBR ZAR MWI GHA ETH GMB NPL RWA BDI SDN ZAR LBR UGA BOL MRT CIV HNDGUY BEN NIC SEN ZMB BFA MLI TZA MOZ MDG GIN TCDTGO NER CMR GNB SLE HTI COM COG CAF UGA MRTHND MWI NPL GHA BFA BEN MDG BOL ERI GMB KGZ SEN TZA SEN HND UGA BEN BFA TZA GHA BOL MLI ZMB MOZ NIC GUY MDG MLI NIC KGZ NPL RWA MWI ETHNER GINCMR CIV ETH GUY NER BDISLE ZMB CMR MOZ MRT GMB COG TCD SLE BDIGIN COM COG TGO GNB ERI HTI STP CIV GNB ZAR TGO ZAR SDN CAF SDN CAF COM HTI LBR Debt relief at time t 1 Country Linear fit Graphs by sub periods Source: Elaboration of World Bank data. The quality of institutions and policies is measured by the CPIA score.

16 The MDRI The Multilateral Debt Relief Initiative MDRI In June 2005, the G 8 proposed a 100% write off of debt by IMF, WB and AfDB (African Development Bank) for countries that have reached, or will eventually reach, the CP under the HIPC Initiative. Under the MDRI, started on July 2006, IDA is expected to provide $37 billion in debt relief over 40 years and the total cost is estimated at appromimately $50 billion. Debt disbursed before end-december 2004 (IMF and AfDF) and end-december 2003 (IDA) and still outstanding at the time of qualification (after HIPC Initiative debt relief) is cancelled. The Initiative applies the criterion of additionality: donors have committed to ensuring that IDA s financial capacity is preserved so that additional resources will be available to support the development efforts of poor countries. The MDRI HIPC vs MRDI Main Characteristics of the HIPC Initiative and the MDRI Country coverage Participating creditors Debt relief provided Total costs of committed debt relief Countries that have benefited from relief Remaining potentially eligible HIPCs HIPC INITIATIVE IDA-only, PRGF-eligible countries with debt indicators above the HIPC Initiative thresholds, which have been engaged in qualifying IMF- and IDA-supported programs All multilateral, official bilateral and commercial creditors External public and publicly guaranteed debt is reduced to the HIPC Initiative thresholds, as calculated at the time of the decision point US $51.1 billion in end-2007 NPV terms US $68.1 billion in nominal terms MDRI HIPC countries having reached completion point International Development Association (IDA), International Monetary Fund (IMF), African Development Fund (AfDF), and Inter-American Development Bank (IADB) Debt disbursed before end-december 2004 (IMF, AfDF and the IADB) and end-december 2003 (IDA) and still outstanding at the time of qualification (after HIPC Initiative debt relief) is cancelled US $22.6 billion in end-2007 NPV terms US $43.3 billion in nominal terms 33 post-decision-point HIPCs 23 completion-point HIPCs 8 pre-decision-point HIPCs 18 interim and pre-decision-point HIPCs 1 MDRI-related estimates include debt relief delivered under the IaDB-2007 Debt Initiative 2 Excludes IMF s MDRI assistance to two non-hipcs (Cambodia and Tajikistan) 1, 2 Debt_Pocket_Fall08_CRA 9/24/08 11:05 AM Page 4

17 The MDRI Challenges Establishing a good track record of reform in the 8 pre-dp countries. Many of them are affected by conflict and/or have protracted arrears problems. Ensuring full participation by all creditors to support the countries efforts towards debt sustainability, limiting free riding (non Paris Club official bilateral creditors represent about 13% of the costs of the HIPC Initiative, but they delivered around 40% of debt relief). Even if post-cp countries are in better debt situation than other HIPCs and non-hipcs, long-term debt sustainability remains a challenge. The distribution of ratings worsened in the last year, with risk of debt distress associated with low export base and poor institutional quality. 4 countries are at high risk of debt distress and only 9 countries have a low risk. Maintaining long-term debt sustainability will require efforts by the HIPCs and the international community to ensure prudent borrowing practices, suitable concessional financing, sustained and broad based growth, a more diversified export base and increased access to markets in developed countries. The MDRI The emerging role of China in Africa The six largest non Paris Club bilateral creditors to LICs are Brazil, China, India, Korea, Kuwait and Saudi Arabia. China ExIm Bank is significantly expanding in Africa (by 15-20% yearly), especially in the infrastructure sectors, without all the conditions generally attached to westerns aid assistance. Even if it provides much needed capital, this could undermine the efforts to promote better governance, labor standards and debt sustainability. China holds claims with 20 post-cp countries and represents about 8% of HIPC debt relief by non-paris Club creditors. It signed debt relief agreements with a number of HIPCs last year, delivering about 34% of its expected debt relief. In Africa, is mainly China that matters for debt sustainability: 1 on the one hand, intensified trade links with China provide higher growth rates, better terms of trade, increased exports and higher public revenues; 2 on the other hand, new lending (free riding) could undermine debt sustainability and export diversification

18 That is why the IMF has undertaken Proof a study to quantify pulling together available information, which is far from complete China s economic engagement with Africa. The The MDRI The emerging role of China in Africa Chart 1 Surging trade Africa s exports to China are soaring as its terms of trade improve. (billion dollars) (2000 = 100) Exports (left scale) Imports (left scale) Terms of trade index (right scale) ran a small, $2 b The composition is similar to that be Chart 2 The partnership China is increasing (percent of Africa s total 50 United Stat EU Sources: IMF, Direction of Trade Statistics; authors calculations. Note: Terms of trade are prices of Africa s exports to China relative to the prices of its imports from China Sources: IMF; authors ca 1 Original EU members bef France, Germany, Greece, Ire and United Kingdom. 44 Finance & Development March 2008 The role of donors Responsible lending The international financial community, pressed by NGOs and civil society, is currently committed to the issue of responsible lending, which gained importance in the last years, especially because of the activity of vulture funds, company that seeks to make profit by buying up bad debt at a cheap price and then attempts to recover the full amount, often by suing through the courts. Recent data released by the World Bank and the IMF show that eleven HIPC countries have been targeted with lawsuits by 50 litigating creditors, mainly located in the US and United Kingdom, whose total claims add up to almost two billion dollars. By now, 25 creditors have obtained court judgements amounting to about 1.2 billion dollars, amounting to % (in the case of Liberia) of the debtor s GDP. IFIs are working in order to develop a codes of conduct for commercial creditors and a Charter for Responsible Lending that should include binding requirements that creditors not sell or re assign sovereign debts owed by nations eligible for debt cancelation without explicit approval of the debtor country.

19 The role of donors Debt relief and institutions building Debt relief could stimulate the build up of better institutions. A policy design that makes the amount of debt reduction conditional upon an actual improvement in institutional quality is likely to be more effective and would act as a strong incentive for recipients to strengthen institutions and policies (governance conditionality). Country CHART selectivity 1: NET (on OFFICIAL the basis DEVELOPMENT of implemented ASSISTANCE policies), IN 2007 based on pull (and not push) instruments or challenge programs (such as the Millennium Challenge Account) encourages countries to reform. USD billion However, governance conditionality could limit the effectiveness of debt 25 reduction policies and it could not reduce significantly the number of debt distress episodes, granting debt relief to selected countries that are better 20 equipped to bear external debt. For debt relief to be effective, it should be (Easterly 2001): 15 1 granted where there has been a proven change from an irresponsible government to government with good policies; a one for all measure that will never be repeated Net ODA in amounts Outline 0 Introduction The HIPC Initiative After the HIPC... The role of donors More commitments... (Source: OECD DAC) Net ODA in as a percentage of GNI As % of GNI UN Target Average country effort

20 The role of donors Aid Statistics, Italy (Source: OECD DAC) The role of donors Aid Statistics, US (Source: OECD DAC)

21 The role of donors More about debt relief... Websites The World Bank IMF Oxfam Eldis Gateway to Development Information Papers and Books Delivering on Debt Relief, Birdsall and Williamson, 2002 The Elusive Quest for Growth: Economists Adventures and Misadventure in the Tropics, Easterly, 2001 Arslanalp, S. and P. B. Henry (2006) Policy Watch: Debt Relief, Journal of Economic Perspectives La cancellazione del debito dei paesi poveri, Dalmazzo e De Blasio (Mulino, 2006)

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