undJe

debovet bulownessce d

tion

countries. We concentrate on whether governance qualityplays a role in the allocation of debt relief among develop-ing countries. The contribution of this paper to the existingliteratument aand thinto thsub-perif govegovernWe aredonornance quality in debtor countries. These countries cover

In the second section of this paper, we give an outline of

as debt overhang, growth enhancement, political determi-nants, and governance quality. In this section we also briey

with respect to the problem of debt overhang in middle-in-come countries (Arslanalp & Henry, 2005), to which it was di-rected. It was not intended to improve the increasingly critical

haranup ofn var-ing onODA)theseted in-ODA

debt. The Paris Club agreements contained some rather vague

tion of the Cologne Terms in 1999, the Paris Club creditor

*We gratefully acknowledge helpful comments by four anonymous refe-

rees as well as by Fredrik Erixon, Michael Pickhardt, Simon Renaud,

Kristin Reichhardt, Christoph Vietze, Sebastian Voll, Hans-Jurgen Wag-

World Development Vol. 37, No. 1, pp. 6280, 2009 2008 Elsevier Ltd. All rights reserved

0305-750X/$ - see front matter

rlddev.2008.01.004introduce our theoretical hypotheses, which we test empiri-the main debt relief programs that have been initializedsince the 1980s. We present theoretical foundations of thedeterminants of debt relief, covering important issues such

countries agreed to raise the level of debt cancellation up toall HIPCs, as well as other indebted developing countries.Thus we are able to analyze dierences between HIPCsand non-HIPCs.

clauses that took a countrys need for debt forgiveness orrescheduling into account. It should have stipulated adjust-ment programs in the debtor countries. 3 With the introduc-cally inndingre on the determinants of debt relief and develop-ssistance is its analysis of the dynamics of debt reliefe change in determinants due to new public insightse nature of governance quality. We distinguish threeiods in the time span during 19902004 to determinernments of creditor countries have accounted for theance and institutional quality of debtor countries.also interested in the question of whether or not

behavior has changed due to an improved gover-

debt situation of highly indebted poor countries.Most of todays HIPC countries are located in Sub-Sa

Africa (SSA). In the early 1990s, the Paris Club, a grocreditor countries with 19 permanent members, agreed oious debt cancellations and rescheduling programs focusthe rescheduling of Ocial Development Assistance (debt and a partial cancellation of non-ODA debt incountries. 2 The so-called London Terms were formula1991 and provided a reduction of up to 50% of nonDebt Relief and Governance Q

ANDREAS FREYTAG aUniversity of

Summary. In this paper we empirically discuss whether or notanalyzing the determinants of debt relief, our results suggest that gtries to forgive debt in the 1990s. Furthermore, even the actual debwhether or not debt forgiveness was granted. Rather, debt relief folforgiven in the rst half of the 1990s were also granted debt forgivechanged at the beginning of the 21st century, when path dependeninto account by donor countries. 2008 Elsevier Ltd. All rights reserved.

Key words debt relief, HIPC, development, governance, institu

1. INTRODUCTION

During the last decade, developing countries have receiveddebt relief of more than 50 billion dollars. The most recent ac-tion is the G8s expression of its willingness to further reducethe developing worlds debt in the future (G8, 2007). The mainobjective of debt relief programs is to reduce the external debtof severely indebted poor countries to a sustainable level.The alleviation of the debt burden for developing countriesis supposed to improve the resource position of these countriesand to enhance investments, economic growth, and develop-ment. There have been high expectations that debt reductioninitiatives, especially the Heavily Indebted Poor Countries Ini-tiative (HIPC) and the Enhanced HIPC Initiative (HIPC II),launched in 1996 and 1999 by the IMF and the World Bank,respectively, will set free HIPC resources for spending on thepoor.In the rst part of this paper we analyze the political and

economic determinants of debt relief for indebted poor

www.elsevier.com/locate/worlddevdoi:10.1016/j.woSection 4. Finally, Section 5 summarizes our mains.

62ality in Developing Countries

GERNOT PEHNELT *

na, Germany

t relief has been economically rational in the past 15 years. Fromrnance quality did not play a role in the decision of creditor coun-rden of highly indebted poor countries was not crucial in decidinged a strong path dependence: those countries whose debt had beenin the second half of the decade. However, this allocation patterniminished and some dimensions of governance quality were taken

s, developing countries

2. DEBT RELIEF PROGRAMS IN RECENT HISTORY

While earlier debt relief initiatives existed, such as the Pear-son Report in 1969 and the Retroactive Terms Adjustment(RTA) program in 1978, the debt problem was not trulyapparent until 1982. In this year, Mexico defaulted on its debtpayments. This event marked the beginning of the debt crisisin developing countries. In the subsequent years, various bilat-eral and multilateral debt relief and restructuring programs 1

were introduced, mainly to prevent further defaults of debtorsthrough the provision of new loans and debt rescheduling.Most of the debt restructuring programs of the 1980s, suchas the Baker Plan and the Brady Plan, bailed out private sectorcreditors and allowed commercial banks to write o some ofthe active debts by rescheduling them, converting them intobonds (e.g., Brady-Bonds), or selling them to InternationalFinancial Institutions (IFIs). It has been claimed that the maingoal of these plans was to avert a nancial crisis in the West(Pettifor & Greenhill, 2002). The Brady Plan was successful

ener, Leo Wangler, and Hans Willgerodt. Final revision accepted: January8, 2008.

decision point and the completion point, the progress of thecountry with respect to institutional reforms and structural

UA90% for the poorest countries, with the stipulation that morewould be available if needed. The Cologne Terms are imple-mented on a case-by-case basis. To qualify under these terms,debtor countries have to show continuing strong economicadjustments (Paris Club, 2006b). Given these terms, onewould expect that the recent debt relief programs institutedby the Paris Club, which have been implemented within theframework of the HIPC Initiative, should have motivatedsound policies in debtor countries.However, empirical evidence does not support this expecta-

tion. The debt relief initiatives up to the mid-1990s did notsolve the debt problem. Many developing countries, particu-larly in Sub-Saharan Africa, have experienced a dramatic riseof their external debt over the last two decades. The constantdiculties in meeting their debt obligations can be traced backto several factors, including exogenous shocks (such as thedeterioration in the terms of trade), civil conict, a lack of sus-tained adjustment or the denial of structural reforms, impro-per lending behavior of creditors, and the lack of prudentdebt management policies by debtor countries (Boote & Thu-gge, 1997).In light of the fact that the traditional mechanisms for deal-

ing with the debt problem could not solve this problem su-ciently, the IMF and the World Bank launched the HeavilyIndebted Poor Countries Initiative in 1996, which focusedon the debt burden of the poorest countries in the world byreducing the multilateral debt of these countries. The primarygoal was to reduce debt burdens to a sustainable level, whichwas dened as a debt-to-export ratio between 200% and 250%and a ratio of debt service to exports within a range of 2025%, all in terms of net present value (NPV). For the rst time,this initiative included the main multilateral creditors such asthe IMF, the International Development Association (IDA),and the African Development Bank (AfDB). The HIPC Initia-tive introduced some guiding principles regarding a countryseligibility for debt relief. To be eligible for HIPC Initiativeassistance, a country had to face an unsustainable debt bur-den, beyond traditionally available debt-relief mechanisms,and establish a track record of reform and sound policiesthrough IMF- and IDA-supported programs.In late 1999, the HIPC Initiative was expanded in order to

provide deeper and more rapid debt relief to a larger numberof countries. The enhanced HIPC Initiative (HIPC II) inte-grated debt relief plans into a comprehensive poverty reduc-tion strategy. It requires a Poverty Reduction Strategy Paper(PRSP) on a broad-based participatory process as a necessarycondition for a country to qualify for debt relief. With this ap-proach, for the rst time the global donor community tookgovernance quality in the debtor countries (at least implicitly)into account. Furthermore, the thresholds for sustainable debtlevels were redened and lowered to a debt-per-export ratio of150% and a debt-to-revenue ratio of 250%. Following the Gle-neagles summit in 2005, the donor community moved rela-tively quickly to promise further relief on debt owed by thepoorest countries on the African continent. The IMF beganproviding debt relief in January 2006, and other internationalnancial institutions and donor countries have followed. Thetotal debt relief from the Multilateral Debt Relief Initiative(MDRI) is expected to be approximately $50 billion.To qualify for debt relief, countries undergo a multi-stage

process. The eligibility of countries to join the HIPC initiativedepends on income and indebtedness criteria. A countrys percapita income must be below the threshold for eligibility forconditional borrowing from both the World Bank and the

DEBT RELIEF AND GOVERNANCE QIMF, and external public debt must exceed 150% of its exports(export case) or 250% of scal revenues (scal case). In anadjustments is under observation and supported by the IMFand the World Bank. 4 In practice, the time span betweenthe decision point and the completion point is rather longfor most of the HIPCs (see Table 1 and IMF/IDA, 2006, An-nex III), and some interim countries are still waiting to reachthe completion point. However, some countries reached thecompletion point quite soon after passing the decision point(see Table 1).To summarize: In contrast to earlier debt relief programs,

the HIPC Initiative and especially the HIPC II Initiativeexplicitly emphasize poverty reduction and the institutionaldimensions of economic development in low-income countries.

3. DETERMINANTS OF DEBT RELIEF

(a) Theoretical considerations

(i) Debt overhangOne popular eciency argument for the provision of debt

relief is the so-called debt overhang. 5 It has been stated thathighly indebted countries benet very little from the returns onany additional investment because of the debt service obliga-tion. Large debt obligationsso the underlying argumenta-tion goescan be seen as a high tax on investment, policyreforms, and development, because a signicant part of thegains from economic adjustment accrue to foreign creditorsand not to the country itself. Essentially, the higher the stockof external debt, the higher the opportunity costs of currentsacrices for the sake of future economic growth. This is thebasis for the hypothesis of the debt Laer curve, which refersto the relationship between the magnitude of a countrys debtand the value of repayments. The NPV of debt repayments in-creases with the face value of total debt up to a certain thresh-old. Beyond this level of indebtedness, a higher face value ofdebt is associated with lower eorts and investments, lowereconomic growth and, therefore, with a lower (expected)NPV of debt service. Creditors should therefore oer debt re-empirical analysis, Addison and Rahman (2004) show thatthe probability of becoming a HIPC is positively correlatedwith the scal decit, with bad governance, and with a lowermonetization of the country. In addition, tropical countriesare more likely to become HIPCs. As of March 2007, therehave been 40 (potentially) eligible countries (see Table 1).The rst stage to qualify for debt relief under the HIPC initia-tive is the so-called decision point. In order to reach this point,an eligible country must have a current track record of satis-factory performance under an IMF program and a PovertyReduction Strategy (PRS), or at least have an interim PRSin place. Once the Executive Boards of IDA and the IMF havedecided that a country should receive debt relief at the decisionpoint, bilateral and multilateral creditors usually start to pro-vide debt relief on a voluntary basis. However, the amount ofdebt relief compared to the total debt stock is rather small, andthe donors maintain the right to revoke the debt relief if thecountrys policy performance tails o. If a country shows acontinued track record of structural reforms, a satisfactoryperformance on an IMF program, and the implementationof the PRS for at least one year, it reaches the completionpoint. Afterwards, it receives a signicant and irrevocablereduction of its foreign debt that brings its debt burden downto a sustainable level. During the period between the initial

LITY IN DEVELOPING COUNTRIES 63lief to countries with large stocks of external debt in order toreduce future debt obligations. This can increase the share of

plet

po

rchnerilrilrilly 2mbrilobembrchnembuaryrilrchrchrilmbmb

VETable 1. Time span between decision and com

Country Decision point Completion

Post-completion point

Benin July 2000 MaBolivia July 2000 JuBurkina Faso July 2000 ApCameroon October 2000 ApEthopia November 2001 ApGhana February 2002 JuGuyana November 2000 DeceHonduras July 2000 ApMadagascar December 2000 OctMalawi December 2000 SepteMali August 2000 MaMauritania February 2000 JuMozambique April 2000 SepteNicaragua December 2000 JanNiger December 2000 ApRwanda December 2000 MaSao Tome Principe December 2000 MaSenegal June 2000 ApSierra Leone March 2002 DeceTanzania April 2000 Nove

64 WORLD DEany marginal gains from economic adjustments going to thedebtor country, thereby creating incentives to make theseadjustments (Corden, 1991). This strategy could end up in awinwin situation by not only easing the debt burden of debt-ors but also increasing future repayments to the creditors. 6

Debt overhang is also supposed to depress growth by increas-ing private investors uncertainty about governmental actiontaken to meet debt service obligations, such as a sudden andsharp increase of money supply that causes ination (Cle-ments, Bhattacharya, & Nguyen, 2005) or distorts future taxpolicies.Several studies have examined the existence of a debt over-

hang in developing countries. Despite ambivalent and mixedresults, 7 the empirical literature mainly supports the debtoverhang hypothesis. Deshpande (1997) nds the debt over-hang eect to be valid for a small sample of 13 countries inthe period from 1971 to 1991. Pattillo, Poirson, and Ricci(2002), using panel regressions for 93 developing countriesover the period 196998, suggest that debt levels beyond160170% of the exports or 3540% of GDP are detrimentalto growth. Bhattacharya and Clements (2004) estimate thedebt overhang threshold at about 50% of GDP for the face va-lue of external debt and about 100105% of exports for theNPV of external debt, based on data over the period 197099 for a group of 55 low-income countries. Imbs and Ranciere

Uganda February 2000 MayZambia December 2000 March

Interim countries

Burundi August 2005 (200Chad May 2001 (200Congo, Democratic Republic of July 2003 (200Guinea December 2000 (200Guinea-Bissau December 2000 (200Haiti November 2006 (200Republic of Congo April 2006 (200The Gambia December 2000 (200

a For some indicators the size of the groups is slightly reduced due to missingevery regression.ion point under the enhanced HIPC initiativea

int (expected) Days between decision point and completion point

2003 9732001 3352002 6392006 2,0082004 882004 881er 2003 1,1252005 1735r 2004 1,400er 2006 2,1002003 9422002 851er 2001 5182004 1,126

2004 1,2172005 1,5512007 2,2812004 1,400er 2006 1,736er 2001 579

LOPMENT(2005) provide non-parametric evidence supporting the exis-tence of a debt Laer curve among developing countries. Theirresults indicate that debt overhang occurs when the face valueof debt reaches 60% of GDP or 200% of exports.However, if there is a net resource transfer to highly in-

debted low-income countries, the incentive argument becomesmore complex than in the traditional debt overhang theory. Ifthe net resource transfer from donors is positively related to acountrys level of indebtedness, the (dis)incentive eects (ofinitial external debts and debt services) for investment andcredit repayment may switch to the opposite direction. Birdand Milne (2003) show that higher levels of outstanding debtare usually associated with higher levels of net resource trans-fers from ocial sources. Marchesi and Missale (2004) alsond that the amount of loans received by HIPCs increaseswith their level of multilateral debt. This evidence impliesdefensive lending as the main motivation of international do-nors. Bulow and Rogo (2005) also point to the phenomenonof defensive lending by international donors in pushing newloans mainly to nance the repayment of older ones.These ndings contradict the hypothesis of debt overhang:

countries that increase their capacity (and willingness) to payare expected to receive fewer future resource transfers. Thedisincentives to the introduction of promising but costlyadjustments do not occur because of the so-called debt over-

2000 902005 1,551

Pre-decision point

7) Central African Rep.7) Comoros7) Cote dIvoire7) Eritrea9) Kyrgyz Republic9) Liberia7) Sudan7) Nepal

SomaliaTogo

data. Possible outliers such as Iraq and Afghanistan are omitted in almost

UAhang but because of the tax on development, which stems fromthe declining share in aid budgets given to relatively successfuldeveloping countries. The ndings of Cordella, Ricci, andRuiz-Arranz (2005) support this hypothesis. The authors ndthat HIPCs indebtedness did not aect either investments orgrowth. In their study the so-called debt irrelevance thresholdis situated between 50% and 60% of GDP. 8 One explanation isthat severely indebted low-income countries benet most fromthe resource transfer provided by donors.Hernandez and Katada (1996), analyzing grants and ODA

debt forgiveness to 32 Sub-Saharan African countries, revealthat debt relief did not reduce the debt overhang of Sub-Saharan African countries at all, but that the nominal debtstock of many countries doubled during 198493, and theirarrears demonstrated dramatic increases as well. The authorssuggest that it may be the case that the forgiven ODA debtwas not being served, which indicates that debt relief activ-ities have not freed additional resources for the recipientcountries. They also nd that receiving more debt reliefdid not increase a countrys import capacity. Contrarily,some countries that have received less debt relief have beenable to expand their imports more than countries that haveexperienced debt relief to a substantially larger extent. Sincethe written-o debt has not been paid o, debt relief doesnot free resources.Birdsall, Claessens, and Diwan (2002) suggest that net trans-

fers are larger in high debt and especially in the high multilat-eral debt regimes. Countries with high debt ratios and highdebts owed to multinational institutions have received largernet transfers. This can be interpreted as a debt subsidy ratherthan a debt tax.

(ii) Growth enhancement and poverty reductionA related question deals with the eectiveness (and e-

ciency) 9 of debt relief. Since both the theoretical literatureand empirical evidence suggest that huge debt burdens tendto be associated with low investment and low economicgrowth in low-income countries, debt relief might have a stim-ulating eect on investment and economic development. Thisjustication of debt relief seems to be quite convincing at rstglance. But the key point with respect to the resource positionof low-income countries, and thus the capacity to invest andpay their obligations in the short run, is still the net resourcetransfer from donors. This includes bilateral and multilateralaid, which is of special importance for HIPCs. Since the reduc-tion of multilateral debt is partly nanced by bilateral donors(e.g., through their contributions to multilateral funds), andthis nancing usually comes from the same political reservoir(namely the donors aid budget), there might be a trade-o be-tween debt relief and ocial development assistance (Birdsallet al., 2002, p. 10). As Martin (2004) suggests, there is evidenceof aid diversion to nance debt relief. Marchesi and Missale(2004), analyzing a panel of 52 developing countries in the per-iod 198299, found a signicant negative correlation betweendebt forgiveness and bilateral grants, which points at a substi-tution of debt reductions for aid transfers. This is likely toreduce the amount of resource transfers available to all low-income countries.However, the empirical literature on the additionality of

debt relief is ambiguous. Ndikumana (2003) does not nd a di-rect causal link between the volume of debt relief or debt for-giveness and the volume of ODA disbursed, havinginvestigated the relationship between debt alleviation pro-grams and ODA (although the total supply of ODA and

DEBT RELIEF AND GOVERNANCE Qgrants declined in the 1990s). Hernandez and Katada (1996)nd a slight crowding out eect between ODA debt reliefand new lending from bilateral resources in a sample of 32Sub-Saharan African countries during the period 198993.While there is no clear-cut empirical evidence of a crowding

out of ODA or other sources of nance by debt relief, there isno evidence of additionality either. In the face of very little (ifnot zero) additionality, the question turns out to be whether itis better to have debt relief or more conventional forms of aid(Bird & Milne, 2000, p. 201).Berthelemy (2004) shows that, within the HIPC frame-

work, a higher proportion of debt relief proceeds will beearmarked to social expenditures in countries with initiallyworse economic governance. In these countries, the HIPCInitiative is not supposed to work; not due to the indirectincentive channel proposed by the debt overhang theory,but because of the direct link between HIPC debt reliefand the required commitment to poverty reduction. In coun-tries with relatively good initial governance quality (virtu-ous countries), the HIPC Initiative is expected to increasethe incentives to policy reforms if the debt relief reducesan existing debt overhang. 10

Clements et al. (2005), using data for 55 low-income coun-tries over the period 197099, nd that large debt burdenshave not seriously hampered public investment in low-in-come countries and that debt relief has led to greater publicconsumption in most cases, rather than investment thatcould have contributed to further economic growth. Consid-ering that only a relatively small share of debt is supposed tobe channeled into public investment, the impact of debt reliefon growth will be modest at best. Chowdhury (2004) showsthat high debt is detrimental to investment and growth inboth HIPCs and non-HIPCs. From this result he concludesthat the initiative should be extended to non-HIPCs. How-ever, this conclusion is not justied by the result, as it isnot shown that debt relief automatically will improve invest-ment and growth. Pattillo, Poirson, and Ricci (2004) supportthis disclaimer and see a relationship between debt relief andgrowth in HIPCs, but they also argue that the special polit-ical and economic situation (in other words, governancequality) in the sample countries should be taken into ac-count.Arslanalp and Henry (2005) conrm this nding by demon-

strating that the debt restructuring and reduction under theBrady Plan led to rising asset prices, increased investment,and faster growth in the 16 countries that received Brady dealsduring 198995. According to the authors, the Brady Planworked quite well, since debt relief was granted to a groupof middle-income developing countries where debt overhanggenuinely stood in the way of protable new lending andinvestment. It is far from certain whether the positive resultsof the Brady Plan can be used to forecast the potential impactof further debt relief on HIPCs (Arslanalp & Henry, 2005, p.1048). Consequently, Arslanalp and Henry (2006) do not ex-pect that further debt relief will address the fundamental prob-lem of inadequate economic institutions that impedesinvestment and growth in the worlds poorest countries. Intheir opinion, the (indirect) approach of debt relief does little,if any, good.Considering these theoretical and empirical ndings,

high debt burdens seem on the one hand to be detri-mental to economic growth in low-income countries.On the other hand, because of the crucial role of (1)governance quality, (2) net transfers (especially throughbilateral and multilateral aid), and (3) ambivalent incen-tive eects, it is uncertain whether debt relief alone can

LITY IN DEVELOPING COUNTRIES 65enhance further economic growth in highly indebtedpoor countries.

VE(iii) Political economy of debt reliefGiven the uncertainty and ambiguity of the results, the ques-

tion remains as to why creditor countries easily and generouslygrant debt forgiveness, and what the main determinants ofdebt relief allocation really are. Michaelowa (2003) providesa theoretical explanation for such observations. She bases apolitical economic model on the utility maximizing behaviorof the political actors participating in the decision-makingprocess of debt relief programs. Thereby, she argues, if politi-cians and international bureaucrats realize that default risksbecome very high, they prefer to grant debt relief in order toconceal their imprudent past lending and to sell the renun-ciation of funds as an innovative poverty reduction measure.This is especially true if lobbying by non-governmental orga-nizations (NGOs) in favor of debt relief increases their chancesof obtaining positive public credit for the delivered debt relief.For example, suppose that despite (or even because of) past

debt relief, the debtor country did not improve its economicand political situation. Nevertheless, politically rational gov-ernments in creditor countries would not take this result as asignal to stop their activities, as this would be a confessionof bad economic policy in the past. Rather, they would ndarguments for further debt relief measures. Such behaviorcan be referred to as defensive lending. Empirical evidenceprovides support for this motivation of debt relief. Ngassam(1992) shows that defensive lending is a useful way of inter-preting lending to Sub-Saharan Africa in the 1980s. Nunnenk-amp (1989) conrms the existence of defensive lending for asample of 36 developing countries in the 1980s. Devarajan,Rajkumar, and Swaroop (1999) also identify defensive lendingin order to avoid defaults as a signicant explanation of donorbehavior. Marchesi and Missale (2004) emphasize that defen-sive lending seems to be the main motivation for the behaviorof multilateral organizations, and that this kind of perverseincentive is even more serious when associated to the multilat-erals.The political gains can even increase if the debt relief initia-

tive is a joint undertaking of several countries. In particular,the G8 provides a good platform for its members govern-ments to gain a competitive edge against the opposition athome. By forming a joint platform, the governments can agreeand assign a greater competence to each other (Vaubel,1991). 11 Thus, the opposition has moral as well as medial dif-culties to argue against the policy deal. In addition, the moraland intellectual support of NGOs demanding debt relief canbe obtained. Looking at colonial history reveals history-re-lated path dependence. Countries, which in the past were col-onies of European G8-members, may be treated moregenerously than others.In order to avoid defaults, creditors may provide debt relief

primarily to countries that are likely to build up arrears, inde-pendently of institutional and governance issues. Since coun-tries with weak institutions are more likely to get intotrouble with respect to their debt obligations, creditors mayeven provide more debt relief to countries with bad policies.Empirical evidence is in line with this reasoning. Birdsallet al. (2002, 2003), after analyzing a sample of 37 Sub-SaharanAfrican countries, suggested that debt relief during 197798had been independent of policy variables in high-debt coun-tries, whereas net transfers were more dependent on gover-nance indicators in the low-debt regimes. Consequently, theysuggested that the international community as a whole seemsto be less selective with respect to the institutional quality ofhigh-debt countries. The authors also found that policy selec-

66 WORLD DEtivity has declined over time; in the 1990s, multilateral andbilateral donors were actually nancing bad policies in high-debt countries. Neumayer (2002) found little evidence of aconnection between the quality of governance and the alloca-tion of debt forgiveness during 198998. Only one out of sixgovernance indicators seemed to be a statistically signicantdeterminant of whether or not a country is deemed eligiblefor receiving debt relief.Alesina and Weder (2002) pointed out that corrupt govern-

ments pursuing very poor policies have received just as muchaid and debt relief as less corrupt ones. According to theirempirical study, which covered the period during 197095,there is not even weak evidence of a negative eect of corrup-tion on received foreign aid or debt relief. Alesina and Dollar(2000) nd a strategic nature of aid, which implies the samebehavior of donors with respect to debt relief. They use con-trol variables such as colonial status (number of years in the20th century when a country was a colony), FDI ows relativeto GDP, and UN voting patterns.

(iv) Institutional change and debt reliefThere is a growing consensus in the economic literature that

decent institutions and governance structures play crucial rolesfor economic development and growth. 12 However, the ques-tion remains whether debt forgiveness can be expected to con-tribute to improvement in governance quality in low-incomecountries, thus creating institutional conditions that are con-ducive to economic growth.Chauvin and Kraay (2005) show that debt relief in 62 devel-

oping countries during 19892003 neither improved the insti-tutional quality nor led to rising FDI or higher rates ofeconomic growth. Easterly (1999) nds that highly indebtedpoor countries became highly indebted mainly because of poorpolicies, not because of external shocks or wars. He estimatesa statistically signicant association between debt relief andnew net borrowing in 40 HIPCs during the period 198997.He concludes that ocial lenders did not adhere to prudentialrules and that the IMF and the World Bank provided far morenancing to HIPCs throughout 197997 than to other devel-oping countries of similar income levels, although the policiesin many HIPCs have been worse. Given these rather unsatis-fying results, the eectiveness of debt relief with respect to gov-ernance quality and economic development in low-incomecountries becomes highly questionable, as it may cause moralhazards and incentives to delay institutional reforms necessaryfor growth.Bauer (1991) raises moral hazard and disincentive issues,

claiming that the beneciaries of debt relief are governmentsthat have not fullled their obligations and have been allowedto do so largely unscathed. Thomas (2001) points out thatsome HIPCs had no policy response to poverty, HIV/AIDS,or corruption until they were required to do so as conditionsfor debt relief under the HIPC Initiative. Therefore, he sug-gests that unless debt relief is eectively conditioned on theappropriate use of funds and the pursuit of structural reforms,it is unlikely to help the poor. 13

In recent years, institutions have received increasing atten-tion in both academia and the public, not least by the path-breaking work of North (1989, 1990), Rodrik et al. (2004),and Williamson (1975). The importance of institutional qual-ity and good governance for growth and development eventu-ally has reached international forums and daily aairs, and isnot least reected in the requirements of the HIPC Initiatives.Berthelemy (2004) shows that in countries with poor initialgovernance quality, debt relief will not create adjustmentand reform incentives. In these countries, the indirect incentive

LOPMENTeects along the lines of the debt overhang theory will berather small; only poverty reduction conditions explicitly

successful form of publicly visible development policy. Thegovernment can improve its position against the countrys

UAlinked to the HIPC Initiative will have favorable outcomes dueto increased social expenditures and poverty reduction pro-jects. It is indeed an interesting question for the internationaldonor community whether it should try to create good per-formers by strong ex-ante conditionality based on commit-ments, or if a reward-based approach to retrospectiveassessments of governance quality is more promising. 14 Whilethe rst approach could create certain incentives to improvegovernance quality, the latter would strengthen the ownershipof reforms. Experience suggests that without sucient com-mitment by the government, policies are often implementedinappropriately and are unlikely to be maintained (Ahmed,Lane, & Schulze-Ghattas, 2001). Conditions imposed by out-side actors may be circumvented, even if ocial criteria havebeen met. This non-compliance can seriously aect the successof reforms induced by conditioned transfers (Bird, 1998). Dol-lar and Svensson (2000) show that governments that are in-clined to reform must be identied and cannot be created byinternational organizations. In order to formulate more eec-tive strategies, it is therefore important to detect countries thatshow the willingness to reform. Arguably, if the internationaldonor community supported reform-minded governments,debt relief programs and loans might make a dierence (Dre-her, 2005).Regardless of this question, the enormous impact of institu-

tions on economic development has been increasingly consid-ered (e.g., Easterly, 2001). Thus, one can imagine a lengthylearning process in politics since political knowledge is inu-enced by preferences and beliefs; it is not unless the policiesdemonstrate poor results after a lengthy implementation thatnew knowledge is accepted (Freytag &Renaud, 2007). The o-cial statements that aim at governance-related conditionalitywithin the framework of the HIPC Initiative seem to conrmsuch a learning process for international donors. The most re-cent example is the G8s focus on governance in Africa ex-pressed in the Heiligendamm Summit Declaration (G8, 2007).

(b) The determinants of debt relief: ve hypotheses

With these theoretical considerations in mind, we proposeve hypotheses to evaluate the motives of creditor countries.There are several possible determinants of debt relief. The rstjustication for debt relief may be the existence of the so-calleddebt burden. Since high levels of indebtedness seem to be det-rimental for growth in low-income countries, debt forgivenessmight be one method for enhanced economic development inHIPCs. Therefore, the amount of debt relief should be posi-tively related to the level of indebtedness, which is the rsthypothesis (H1) to be tested.However, a political economy perspective suggests a dier-

ent theoretical reasoning raised by Michaelowa (2003).According to this reasoning, politicians in donor countriesdo not like to admit policy errors and are supposed to providedebt relief in order to avoid arrears. Traditional debt-reliefmechanisms often have been designed as a quasi-automaticprocess of providing debt relief specically to countries thatwere most likely to fall into arrears. Applied to the threesub-periods we have selected, one would expect path depen-dence. Our second hypothesis (H2) is as follows: debt reliefis positively related to debt relief in previous periods.For governments in rich countries there may be another

incentive for debt relief, such as poverty that can be observedin the daily news. Famines, natural catastrophes, and otherdisasters can be instrumental when the government is not will-

DEBT RELIEF AND GOVERNANCE Qing or able to initiate dierent and possibly more eectivedevelopment policies, such as opening foreign trade for agri-opposition, who are unable to dissent without appearingheartless and stingy. Furthermore, the HIPC Initiatives areexplicitly designed to address poverty. Therefore, one couldexpect debt relief to be positively correlated with the degreeof poverty, at least after the introduction of the HIPC Initia-tives. This is our third hypothesis (H3) to be tested.Another determinant of debt relief may be the abundance of

natural resources, though the theoretical considerationsregarding this relationship are not conclusive. On the onehand, one could expect a negative relationship between largeresource deposits and debt relief since countries that areblessed with resources are able to generate enough exportearnings to fulll foreign debt obligations. On the other hand,resource rich countries may be of special strategic importancefor industrialized countries. 16 The large oil consumers mayuse development aid and debt relief as strategic instrumentsto strengthen the ties to oil-exporting developing countries.That is why one would expect a positive correlation betweenoil abundance and debt relief. Furthermore, it may be the casethat oil-exporting countries are particularly poor and highlyindebted due to the so-called Dutch disease. This phenomenonrefers to a currency appreciation due to the huge inows offoreign exchange, internal conicts, and economic slack be-cause of corrupt elites abusing the revenues (voracity eect).We expect the strategic considerations of the creditor countriesin combination with the Dutch disease to be predominant.Therefore, our hypothesis (H4) claims that oil-exporting coun-tries receive higher debt relief than others.Thus, according to the hypotheses H1H4, debt relief for

developing countries can be interpreted as a function of the ac-tual debt burden, debt relief in the past, the degree of a coun-trys poverty, and a dummy for oil-exporting countries.Finally, we formulate a dierent hypothesis; namely that

governments in creditor countries are able to learn about theconditions for eective debt relief and to distinguish debtorcountries from each other. This would imply that governmentsof creditor countries take into account debtor countries gov-ernance quality or changes in the governance quality morecarefully in later periods of debt relief. The design of the HIPCInitiatives supports this assumption since the Initiatives explic-itly evaluate governance and institutional aspects. Of course,this does not imply that the other determinants are irrelevant.However, our hypothesis is that good governance (H5a) orimprovement in governance quality (H5b) positively inuencesthe amount of debt forgiveness after the introduction of theHIPC initiatives, implying increasing economic rationality ofdonor countries.We will add a number of control variables, namely FDI

ows, ODA, public expenditures, and colonial history. Theconsideration of colonial history is generally justied as theold ties may encourage creditor countries to grant debt relief,as a positive relationship would be expected. One can expectthat former colonies receive dierent treatment compared tonon-colonies.We will test our hypotheses empirically in the following sec-

tion.

4. EMPIRICAL ANALYSIScultural products and HeckscherOhlin goods. 15 Then debtrelief is a politically, although not economically, cheap and

LITY IN DEVELOPING COUNTRIES 67This section reports the results of the empirical analysis.We do cross-country estimates for three periods (199094,

VE199599, 200004). We start by giving a brief overview of var-ious debt relief programs in recent history. In Section (a), weintroduce the database for 123 developing countries in the per-iod 19902004. After this, we test our theoretical consider-ations about the determinants of debt relief (H1H5).

(a) Data

The data include macroeconomic variables and a variety ofinstitutional variables describing the quality of governancestructures, as well as dierent control variables. We split theperiod into three sub-periods, namely 199094, 199599, and200004, and use average data for these sub-periods. 17 Wedo not apply panel techniques within these sub-periods be-cause some of the variables, especially debt relief, occur in arather discontinuous manner and some data are not availablefor every year.The sum of debt relief for countries in the 19902004 sample

amounts to about US$51 billion (face value). We use data ondebt relief reported by the Development Assistance Commit-tee (DAC) of the Organization for Economic Co-operationand Development (OECD, 2006). These include the forgive-ness of loans reported by creditor countries as a componentof ocial development assistance (ODA). Further data ondebt are taken from the Joint BIS-IMF-OECD-World Bankstatistics on external debt. 18 It may be argued that the face va-lue of debt and debt relief is not appropriate to calculate theireconomic eects, and that one should rather use net presentvalue (NPV) terms. Although a few attempts to calculate theNPV of debt relief have been made, there currently exists nocomprehensive database on the NPV of debt relief calculatedon a loan-by-loan basis. Since the reliability of the existingestimates of debt relief in NPV terms is questionable, we shalluse the reported face values.Additionally, we want to analyze the eects of and justica-

tion for debt relief from the donors point of view, meaningfrom the perspective of the OECD countries taxpayers. Onecan also argue that in the creditors perspective, the NPV ofthe loans does not matter in practice because the probabilitythat HIPCs would have met their obligations (including inter-est) can be expected to be close to zero. Therefore, the re-ported (nominal) amount of debt relief is most important(among others as a selling argument for tax-payers, NGOs,etc.). Donor countries usually report the amount of debt reliefin face value terms. Finally, since we are discussing the prob-lem of additionality of debt relief, our method can be justiedbecause of the possible trade-o between debt relief and realcurrent resource transfer through ODA.Our main economic indicators, such as GDP, GDP growth,

GDP per capita, and data on international trade, are takenfrom IMF (2006) and WTO (2006) sources. Some descriptivestatistics for the whole sample and the HIPCs only are re-ported in Table 2.We use additional data on public expenditure, FDI, colonial

history, religion dummies, a land lock dummy, a dummy foroil-exporting countries, HIV/AIDS, and the Human Develop-ment Index reported in the CIA World Factbook (2006), bythe WHO (2006), the UNESCO (2006), and the HumanDevelopment Reports (HDR, 2006). The fact that not all ofthese data are available for every single country reduces oursample size in some of our regressions.To guarantee reliability in one of the major variables in our

analysis, we use governance indicators from dierent sources.Our data set covers the following governance indicators:

68 WORLD DEThe indicators Civil Liberties (1) and Political Rights(2) provided by Freedom House (2005) on a yearly basis coverthe whole period 19902004. We have transformed them sothat higher values indicate better performance. The originalindicators range from 1 (free) to 7 (not free). The surveyincludes both analytical reports and numerical ratings. Thesurvey ndings are reached after a multi-layered process ofanalysis and evaluation by a team of regional experts andscholars. 19

The aggregated governance indicators estimated by WorldBank sta are provided in a two-year-cycle. 20 The indicatorVoice and Accountability (3) includes a number of mea-sures of the political process, civil liberties, political and hu-man rights. Political Stability and Absence of Violence(4) combines several indicators that measure perceptionsof the likelihood that the government in power will bedestabilized or overthrown by unconstitutional or violentmeans. Government Eectiveness (5) combines responseson the quality of public service provision, the quality ofthe bureaucracy, the competence of civil servants, the inde-pendence of the civil service from political pressures, andthe credibility of the governments commitment to policies.Regulatory Quality (6) focuses on the policies themselves,including measures of the incidence of market-unfriendlypolicies such as price controls or inadequate bank supervi-sion, as well as perceptions of the burdens imposed byexcessive regulation in areas such as foreign trade and busi-ness development. The indicator Rule of Law (7) includesseveral measures of the extent to which agents have con-dence in and abide by the rules of society. These includeperceptions of the incidence of crime, the eectiveness andpredictability of the judiciary, and the enforceability of con-tracts. Control of Corruption (8) is a measure of the ex-tent of corruption, conventionally dened as the (mis) useof public power for private gain. It is based on scores ofvariables from polls of experts and surveys (The WorldBank, 2005). The six indicators are normalized and rangefrom 2.5 to 2.5. They have a mean of zero and a stan-dard deviation of one, and higher values indicate bettergovernance.The Index of Economic Freedom (9) provided by the Her-

itage Foundation (2006) includes a broad array of institutionalfactors determining economic freedom, especially corruptionin the judiciary and government bureaucracy, non-tari barri-ers to trade, the scal burden of government, the rule of law,eciency within the judiciary and the ability to enforce con-tracts, regulatory burdens on business, restrictions on banks,labor market regulations as well as informal market activitiesincluding corruption, smuggling, and piracy of intellectualproperty rights. We transformed the index so that higherscores indicate an economic environment or set of policies thatare most conducive to economic freedom. The original scoreranges from 1 to 5, where higher scores indicate lower eco-nomic freedom.Economic Freedom in the World (10) calculated by the

Fraser Institute (2005) measures the degree of economicfreedom present in the ve areas Size of government, Le-gal structure and security of property rights, Access tosound money, Freedom to trade internationally, andRegulation of credit, labor, and business. This indicatoris a broad measure of conditions that are supposed to besupportive of economic growth. 21 Within the ve majorareas, 21 components are incorporated into the indexthough many of those components are themselves madeup of several sub-components. 22 The scale runs from 0 to10. Higher values indicate a higher degree of economic free-

LOPMENTdom. We use data for the years 1990, 1995, 2000, 2001,2002, and 2003.

crip

Max

,55080.67.337.4

,65680.57.037.4

UATable 2. Des

Min.

Sub-period 1 (199094)All developing countries

GDP per capita (PPP) 406.61 11Total external debt in % of GDP 1.81 7Debt service in % of exports 0.10Debt relief in % of GDP 0.00

Sub-period 1 (199094)HIPCs

GDP per capita (PPP) 406.61 2Total external debt in % of GDP 5.91 7Debt service in % of exports 2.40Debt relief in % of GDP 0.00

Sub-period 2 (199599)

DEBT RELIEF AND GOVERNANCE Q(b) Governance quality and HIPC status

Since we focus on changes in governance quality, the devel-opment of country specic governance indicators is quite rel-evant. We focus on the changes of governance indicatorsbetween the second and third sub-period as these indicatorsare only available for larger groups after 1994. As Table 3asuggests, HIPCs seem to have shown a worse performanceon average regarding the development of governance qualitysince the mid-1990s. This conrms the ndings by Addisonand Rahman (2004), who showed that the probability to be-come a HIPC is positively related to bad governance. How-ever, the dierences between HIPCs and non-HIPCs are notsuciently signicant in terms of the changes in governanceindicators, except for GOVEFF. 23

To further detail how a countrys HIPCs status might beassociated with changes in governance quality, we distinguishbetween HIPCs that reached the completion point before thesummer of 2002 (early completion countries), mid-completion

All developing countries

GDP per capita (PPP) 473.92 12,146Total external debt in % of GDP 8.70 750.Debt service in % of exports 0.00 40.2Debt relief in % of GDP 0.00 47.0

Sub-period 2 (199599)HIPCs

GDP per capita (PPP) 473.92 3,842Total external debt in % of GDP 16.29 750.Debt service in % of exports 0.20 40.2Debt relief in % of GDP 0.00 47.0

Sub-period 3 (200004)All developing countries

GDP per capita (PPP) 542.33 25,738Total external debt in % of GDP 6.15 650.Debt service in % of exports 0.45 52.0Debt relief in % of GDP 0.00 106.

Sub-period 3 (200004)HIPCs

GDP per capita (PPP) 406.61 2,656Total external debt in % of GDP 36.12 650.Debt service in % of exports 0.45 49.4Debt relief in % of GDP 0.00 106.

The reported data are the average values in the three sub-periods. The variouThe number of all developing countries covered by the variables varies betweeperiods. The number of (potentially eligible) HIPCs covered by these statisticsa The discovery and exploitation of large oil reserves in Equatorial Guinea hative statistics

. Mean Standard dev.

.80 2,735.60 2,140.9225 94.18 118.520 15.18 12.481 2.33 5.32

.47 1,136.35 503.2125 161.43 167.856 20.15 12.631 5.79 7.76

LITY IN DEVELOPING COUNTRIES 69countries that reached the completion point during July 2002December 2003, late completion countries, 24 and non-comple-tion countries that have not reached the completion point byMarch 2007 (including the interim countries and the pre-deci-sion countries). Table 3b shows that there are some signicantdierences between the groups regarding the development oftheir governance quality. Non-completion countries performsignicantly worse over time than the other HIPC groupsand non-HIPCs. The six countries that reached the completionpoint before July 2002 and, surprisingly, the 13 countries thatreached the completion point after 2003 show the best perfor-mance in most of the governance dimensions on average,though most of the dierences to the other HIPCs that havereached the completion point and the non-HIPCs are not suf-ciently signicant. 25

The robustness of these ndings is limited due to the verysmall number of countries in the dierent HIPC groups. Thatis why we tested the dierences in the changes of governancequality between the group of HIPCs that have reached the

.02 3,131.44 2,472.8093 89.99 102.506 12.82 8.906 2.87 7.56

.79 1,267.95 659.0393 158.11 145.606 16.74 9.746 8.02 11.69

.39a 3,903.63 3,545.4263 80.91 81.778 11.65 9.1104 4.90 12.85

.47 1,136.35 503.2163 136.52 114.170 12.57 9.6404 14.34 19.43

s sources are mentioned in the text.n 99 and 120 because of missing values in the dierent categories and sub-varies between 35 and 40.

s caused tremendous economic growth in recent years.

HI

(N

.070.01.180.14

0.040.18

VETable 3a. Changing governance quality in

HIPCs

(DCIVLIB 23) 0(DPOLR 23) (DHERITAGE 23) 0DGOVEFF 23 (DCONTROLC 23) (DPOLSTAB 23)

70 WORLD DEcompletion point and the non-completion countries. Table 3cillustrates that the HIPCs that have already reached comple-tion (by March 2007) have better performance with respectto development in some governance dimensions, such as civilliberties, governance eectiveness, control of corruption,voice, and accountability. 26

Together, these ndings suggest that changes in governancequality are not necessarily correlated to the countrys eligibil-ity for HIPC debt relief. However, the multi-stage processwithin the HIPC framework seems to follow the intended pol-icy, since those HIPCs that had already reached the comple-tion point performed signicantly better than those that had

(DREGQUAL 23) 0.08(DRULEOFLAW 23) 0.08(DVOICE 23) 0.10

Governance indicators in parentheses: Dierences are not signicant.Bold: Dierences signicant at the 5% level. Sample size is slightly reduced fo

Table 3b. Changing governanc

Governancedimension Early completion

(N = 6)Mid completion

(N = 3)

(DCIVLIB 23) 0.267 0.083(DPOLR 23) 0.067 0.033(DHERITAGE 23) 0.243 0.144DGOVEFF 23 0.020 0.095DCONTROLC 23 0.005 0.137(DPOLSTAB 23) 0.206 0.442(DREGQUAL 23) 0.017 0.373(DRULEOFLAW 23) 0.063 0.151DVOICE 23 0.025 0.235

Governance indicators in parentheses: Dierences between groups are not suBold: Dierences are signicant at the 5% level.Italic: Dierences to other groups are at least weakly signicant. Sample size

Table 3c. Changing governance

Governance dimension

Completion point HIPCs

DCIVLIB 23 0.218(DPOLR 23) 0.166(DHERITAGE 23) 0.173DGOVEFF 23 0.058DCONTROLC 23 0.090(DPOLSTAB 23) 0.027(DREGQUAL 23) 0.010(DRULEOFLAW 23) 0.006DVOICE 23 0.026

Bold: Dierences are signicant. Governance indicators in parentheses: DierPC and Non-HIPC developing countries

Mean

= 40) Non-HIPCs (N = 83)

1 0.2840 0.1255 0.0772 0.000

1 0.0392 0.078

LOPMENTnot reached the completion point or were still pre-decisioncountries. Countries that increase their governance qualityreach the completion point earlier. In other words, the HIPCInitiatives seem to have changed the allocation pattern tosome extent.

(c) The determinants of debt relief

(i) Determinants of debt relief during the 1990sOur dependent variable is the amount of debt relief awarded

in the sub-period 199599 relative to the average GDP in thissub-period. A substantial number of countries in our sample

3 0.0643 0.0347 0.005

r some indicators.

e quality and HIPC status

Mean

Late completion(N = 13)

Non-completion(N = 18)

Non-HIPCs(N = 83)

0.227 0.108 0.2840.242 0.225 0.1250.145 0.202 0.0770.086 0.245 0.0000.119 0.201 0.0390.167 0.374 0.0770.076 0.063 0.0000.005 0.177 0.0340.099 0.270 0.005

ciently signicant.

is slightly reduced for some indicators.

quality and completion point

Mean

(N = 22) Non-completion HIPCs (N = 18)

0.1080.2250.2020.2450.2010.3740.0630.1770.270

ences are not signicant.

ations, the costs of past ODA and debt relief programs are

UAdid not receive any debt relief at all. Since this produced askewed distribution of the dependent variable, we applied(left-censored) Tobit estimation techniques to distinguish be-tween countries that received debt relief and those that didnot. Furthermore we accounted for the amount of debt reliefrelative to GDP. By doing so, we not only cover the questionof whether or not a country was found to be eligible for debtrelief (which is the rst step if one wants to identify determi-nants of debt forgiveness), but we also address the assumptionthat a factor having a positive eect on the probability of actu-ally receiving debt relief should also inuence the amount ofthe debt forgiveness positively. 27 We test the following model:

DRperGDP 2 c b1DebtperGDP 1 b2DRperGDP 1 b3ODAperGDP 1 bMXM bNXN e

with DebtperGDP1 being the debt stock relative to the GDP insub-period 1 DRperGDP1, the amount of debt relief relative tothe GDP in sub-period 1 28 ODAperGDP1, the aid to GDP ra-tio in sub-period 1 XM representing a vector of institutionalvariables, and XN representing a vector of controls. We useeach governance indicator separately because we want to iden-tify governance dimensions that might have been weightedmore strongly by donor countries when they decided to grantdebt forgiveness.Table 4 shows that the major part of the variance of the

amount of debt relief per GDP in the second half of the1990s can be explained by the countrys indebtedness mea-sured by external DebtperGDP, 29 the relative amount of debtrelief per GDP provided in the rst sub-period (199094), andthe amount of ODA per GDP provided in this sub-period. TheGDP per capita serves as a proxy for poverty, which shows theexpected sign and is suciently signicant.These results can be interpreted as follows: First, in the late

1990s, creditor countries took the indebtedness of a countryinto account when they decided if that country should receivedebt forgiveness. Second, the degree of the indebtedness of acountry is positively correlated to the relative amount of thedebt relief provided. At rst glance, these results seem to con-rm our rst hypothesis (H1). Interestingly, the strong positiverelationship between the debt burden and the amount of debtrelief weakens when we add (or use) the amount of debt serviceper export as a measure of a countrys debt burden (see regres-sion II). The coecient of this variable is positive but onlyweakly signicant. Although the level of indebtedness hasbeen taken into account, the actual debt burden has notplayed a major role in the donors considerations in the1990s. Based on this evidence, hypothesis H1 cannot be re-jected, but we do not nd strong support for it either.Our ndings conrm the supposition that some severely in-

debted countries did not pay their obligations or at least fellinto substantial arrears. The correlation between the relativedebt stock and the debt service per export is remarkablylow. The coecient of correlation lies just about 0.24, whichindicates the existence of the debt Laer curve. Creditor coun-tries obviously provided higher debt forgiveness through debtrestructuring, postponements, or debt cancellation in order toprevent additional arrears, which is also in line with our theo-retical presumptions. Indeed, this might have created evenmore disincentives for necessary adjustments in some highlyindebted poor countries.However, the most striking result is the strong path depen-

dence of debt relief. Once a country received debt forgivenessin the early 1990s, the probability of gaining from additional

DEBT RELIEF AND GOVERNANCE Qdebt forgiveness in the second half of the 1990s is close toone. Furthermore, the higher the amount of the debt reliefnot irrelevant in the decision-making process about currentand future debt forgiveness, even if it becomes clear that theseexpenditures did not spur economic development orimprovements in governance quality. 31

The negative and signicant coecient of GDP per capitasupports hypothesis H3. The poorest countries received thehighest relative amounts on debt relief.The variable OILEX does not add much explanatory power

to the model, but is at least weakly signicant. It seems thatdebt relief has been partially granted in favor of oil-exportingcountries. However, this nding is not very robust with respectto dierent model specications. Although there seems to be aslight tendency in favor of oil-exporting countries, we do notnd strong support for hypothesis H4.The governance indicators do not add any extra explanatory

power to the estimation, and some even show a negativesign. 32 Obviously, governance quality did not play a signi-cant role for the donors decision whether or not a countryshould receive debt relief, nor did it inuence the amount ofdebt relief granted. Thus, the hypothesis which states that do-nor countries have taken the state of governance quality intoaccount while deciding debt relief (H5a) must be rejected forthe second half of the 1990s.We do not report the results for every control variable since

they were insignicant. The coecient for COLONTOT,though showing the expected sign, is at best weakly signicantand not robust. Colonial history seems to be of minor impor-tance for the provision of debt relief, regardless of whether avariable that counted the number of years a country was a col-ony in the 20th century (COLON20) or in total (COLON-TOT) was used. Therefore, there is no evidence that colonialties play a signicant role in donors decisions. 33

(ii) Determinants of debt relief at the beginning of the 21stcenturyNow we turn to sub-period 3. We test the hypothesis that

the allocation pattern of debt relief has changed after it be-came more apparent (and not only in academic circles) thatgovernance quality plays a crucial role for growth and devel-opment. Formally, the HIPC and HIPC II Initiatives are builtupon this requirement. We test whether this is also materiallythe case.The dependent variable is now the amount of debt relief per

GDP provided in the third sub-period (200004). Again, weuse the level of indebtedness measured by the debt stock perGDP as the rst independent variable. In order to test the pathdependence found in the last section, we integrate the amountof debt relief relative to GDP awarded in the 1990s (sub-peri-ods 1 and 2). We shall also test if the path dependence can befound with respect to ODA payments provided in sub-periods1 and 2. This leads us to the following equation that we use inTobit estimations:

DRperGDP 3 c b1DEBTperGDP 2 b2DRperGDP 12 bMXM bNXN e:

The explanatory power of the rst three regressions in Tablegranted in the past, the higher is the expected relative debt re-lief in the future. The results strongly support our secondhypothesis (H2). Donor countries obviously do not interpretpast ODA and debt relief as sunk costs, which is what theyclearly are. 30 Contrary to reasonable economic consider-

LITY IN DEVELOPING COUNTRIES 715 falls signicantly behind the comparable ones from the pre-vious section. Only about 40% of the variance of the amount

Table 4. Tobit estimation IVIII for the determinants of debt relief in sub-period 2 (199599)d

I II III IV V VI VII VIII

DebtperGDP (sub-period 1) 0.04*** (4.87) 0.05*** (7.49) 0.03*** (5.44) 0.03*** (5.52) 0.03*** (5.44) 0.03*** (4.77) 0.04*** (6.21)DRperGDP (sub-period 1) 0.75*** (4.64) 0.99*** (10.91) 0.65*** (6.31) 0.92*** (8.33) 0.93*** (8.55) 0.89*** (7.71) 0.95*** (8.43) 0.79*** (7.45)POVERTY (199497) 0.03 (0.94)GDP per capita (sub-period 1) 0.018**(2.39)ODA per GDP (sub-period 1) 5.59*** (7.63)OILEX 2.49** (1.97)COLONTOT 0.01* (1.94)Debt Service (sub-period 1) 0.08* (1.73)GOVEFF (sub-period 2) 1.05 (0.94)CONTROLC (sub-period 2) 1.45 (1.06)REGQUAL (sub-period 2) 1.09 (1.22)RULEOFLAW (sub-period 2) 0.50 (0.45)HERITAGE (sub-period 2) 1.35 (1.45)N 61 109 109 109 109 109 109 98Adj. R2 0.748 0.779 0.777 0.680 0.684 0.676 0.676 0.801

Dependent variable is the amount of debt relief per GDP in sub-period 2 (199599). Absolute z-values in parentheses.dWe focus on the governance indicators that become signicant or nearly signicant in the third sub-period. The coecients of the other governance indicators are highly insignicant in the second sub-period, as well.* Signicant at the 10% level.** Signicant at the 5% level.*** Signicant at the 1% level.

72WORLD

DEVELOPMENT

Table 5. Tobit estimation IIX for the determinants of debt relief in sub-period 3 (200004)

I II III IV V VI VII VIII IX

DebtperGDP (sub-period 2) 0.10*** (5.31) 0.10*** (5.19) 0.10*** (5.19) 0.08*** (3.64) 0.09*** (4.09) 0.08*** (3.76) 0.09*** (4.10) 0.08*** (3.88) 0.09*** (4.05)DRperGDP (sub-period 1 and 2) 0.29 (1.24) 0.33 (1.41) 0.30 (1.25) 0.40** (2.47) 0.34** (2.15) 0.38** (2.39) 0.31* (1.93) 0.36** (2.24) 0.31* (1.89)GDP per capita (sub-period 2) 0.02** (2.52) 0.02*** (2.81) 0.02** (2.40)OILEX 4.73 (1.61)COLONTOT 0.02 (0.22)POVERTY 0.14*** (3.36) 0.18*** (4.09) 0.16*** (3.61) 0.16*** (3.90) 0.16*** (3.63) 0.16*** (3.67)GOVEFF (sub-period 3) 4.80*** (2.59)CONTROLC (sub-period 3) 3.08 (1.58)REGQUAL (sub-period 3) 4.48*** (2.65)RULEOFLAW (sub-period 3) 3.04 (1.63)HERITAGE (sub-period 3) 3.88** (2.05)N 109 109 109 75 75 75 75 75 75Adj. R2 0.394 0.413 0.389 0.633 0.665 0.637 0.664 0.643 0.646

Dependent variable is the amount of debt relief per GDP in sub-period 3 (200004). Absolute z-values in parentheses.* Signicant at the 10% level.** Signicant at the 5% level.*** Signicant at the 1% level.

DEBTRELIEFAND

GOVERNANCEQUALITYIN

DEVELOPIN

GCOUNTRIES

73

VEof debt relief provided in the third sub-period can be explainedby the level of indebtedness, the amount of previous debt re-lieves, and the GDP per capita (see regression I in Table 5).Interestingly, the coecients of the relative amount of

debt relief in the past remain positive but are less signicantthan the ones in Table 4 by far, and even become insignif-icant in some regressions. 34 The path dependence of debt re-lief seems to have weakened in recent years. Although westill observe some sort of path dependence at the beginningof the 21st century, we nd only weak support for thehypothesis that debt relief in the third sub-period has beenlargely determined by past debt relief (or aid). This ndingsuggests that donor behavior may have changed in recentyears. It seems that criteria other than the fact that a coun-try has previously received debt relief have determined debtrelief in recent years.The coecient of the stock of foreign DebtperGDP is posi-

tive and signicant, which indicates that the level of indebted-ness has been taken into account. However, introducing thedebt service per export quota as a measure for indebtednessshows that the actual debt burden was not the major determi-nant of debt relief in the third sub-period since the coecientfor this variable is mostly insignicant (results are not pre-sented here). Again, the results are not conclusive with respectto hypothesis H1.The GDP per capita shows the expected sign and remains

signicant. The lower the per capita income the higher is therelative debt relief. POVERTY is the percentage of the popu-lation that lived below the poverty line at the beginning of the21st century and serves as an alternative measure for the levelof poverty (see regressions IVIX in Table 5). The integrationof this variable adds much explanatory power to the model. 35

The positive and highly signicant coecients of POVERTYconrm that debt relief in the third sub-period has been pro-vided in favor of poor countries. All in all, we nd supportfor hypothesis H3 that donors have taken into account the le-vel of poverty.The inclusion of the variable OILEX (H4) does not change

the pattern of the estimation. Although the coecient for OI-LEX is positive and close to weak signicance, we do not ndsupport for the hypothesis that debt relief has been provided infavor of oil-exporting countries. Colonial ties seem to be irrel-evant for the provision of debt relief at the beginning of the21st century. 36

The question is if recent debt relief has been provided tothose countries that have shown sound policies or at leastimproved their governance quality. Table 5 provides somepromising results. The coecients of all governance indica-tors are positive and some of them (GOVEFF, REG-QUAL, and HERITAGE) reach sucient signicancelevels. The other governance indicators just fail to reachweak signicance. 37 It seems that, in contrast to the1990s, governance quality of developing countries hasplayed a role in the decisions of donor countries in recentyears. Obviously, governments of donor countries seem tohave learned and adjusted their forgiveness pattern to someextent. The quality of governance indicators was moreimportant in the third sub-period. It seems that interna-tional donors do pay attention to the criteria of the HIPCand HIPC II Initiatives that refer explicitly to povertyreduction and governance quality.Bourguignon and Sundberg (2007) as well as Heckelman

and Knack (2006) reach similar conclusions with respect toocial development aid. Whereas in the 1980s institutions

74 WORLD DEdid not play a role in the decisions to grant aid, since the1990s this has changed. At the same time when internationaldonors started to link debt relief to institutional reforms, aidhas been givenat least partiallydepending on governancequality.Finally, we analyze whether or not debt relief was granted to

acknowledge successful eorts to improve governance qualityin debtor countries. We test whether the change in governancequality inuenced the pattern of debt relief at the beginning ofthe 21st century (H5b). As the Tobit regression results (Table6) suggest, debt relief in the period 200004 seems to be posi-tively related to improvements in governance quality, thoughonly three out of ten governance indicators reach sucient sig-nicance levels. However, these results support the hypothesisthat donor country governments have learned and adaptedtheir behavior.In order to explicitly address whether the HIPC Initiatives

have had an eect on debt relief in recent years, as well as totest the ndings of Section 4b, we extended our analysis.First, we used a Heckman selection model (Heckman,1979) 38 with a HIPC dummy as selection criterion in the rststep (probit) and the amount of debt relief per GDP in sub-period 3 as the dependent variable in the second step. The re-sults (see Table 7) demonstrate an interesting pattern.Whereas the debt burden, previous debt relief, and the levelof poverty obviously have been crucial for the decision if acountry should be eligible for debt relief under the HIPC Ini-tiatives (see selection equations IVII), these parametersplayed only a minor role in determining the actual amountof debt relief in the period 200004 (see outcome equationsIVII).The opposite seems to be the case for some governance indi-

cators. While there is no correlation between the change ofgovernance quality and the probability of being found to beeligible for HIPC debt relief, the amount of debt relief seemsto be positively related with improvements in governancequality. OLS-regressions for the sub-sample of HIPCs withthe amount of debt relief per GDP in sub-period 3 (200004) as dependent variable conrm our results. The coecientsof all governance indicators are positive, with DGOVEFF,DPOLSTAB, DRULEOFLAW, and DVOICE reaching su-cient signicance levels. Furthermore, ordered probit regres-sions for the sub-sample of HIPCs also conrm ourndings. 39 HIPCs that have improved their governance qual-ity (especially RULEOFLAW, GOVEFF, and CONTROLC)reach the completion point earlier than HIPCs that have dem-onstrated worse performance with respect to the change ingovernance quality.These results are very robust and conrm earlier nd-

ings. The decision to rate a country as eligible for HIPCdebt relief is positively related to the relative debt stock,previous debt relief, and the level of poverty, whereasgovernance quality did not play any role in determiningif a country is eligible for HIPC debt relief. However,within the HIPC framework, donors have taken highergovernance quality and improvements of governance qual-ity into account. This promising result suggests that thediscussion of the role of decent institutions for economicdevelopment has not only produced political statementsbut also concrete policy measures. Thus, hypotheses H5aand H5b cannot be rejected. However, past debt reliefdoes not seem to have contributed to improvements ingovernance quality. We do not nd any positive correla-tion between debt relief in the 1990s and improvementsin governance quality. Most recently, international donorsseem to have changed their allocation pattern toward a

LOPMENTreward approach based on retrospective assessments ofthe governance quality of creditor countries.

Table 6. Tobit estimation XXVIII for the determinants of debt relief in sub-period 3 (200004)

X XI XII XIII XIV XV XVI XVII XVIII

DebtperGDP (sub-period 2) 0.09*** (4.18) 0.08*** (3.60) 0.08*** (3.53) 0.08*** (4.06) 0.08*** (3.66) 0.08*** (3.70) 0.08*** (3.65) 0.08*** (3.64) 0.08*** (3.80)DRperGDP (sub-periods 1 and 2) 0.31* (1.94) 0.40** (2.57) 0.41** (2.56) 0.34** (2.35) 0.37** (2.34) 0.38** (2.51) 0.40** (2.52) 0.40** (2.46) 0.36** (2.27)POVERTY 0.15*** (3.63) 0.15*** (3.59) 0.14*** (3.41) 0.14*** (3.59) 0.16*** (3.63) 0.14*** (3.21) 0.14*** (3.16) 0.14*** (3.31) 0.14*** (3.38)DGOVEFF 23 5.55** (2.00)DCONTROLC 23 4.97 (1.61)DREGQUAL 23 1.70 (0.71)DRULEOFLAW 23 11.38*** (3.43)DHERITAGE 23 5.89** (2.02)DVOICE 23 2.50 (1.11)DPOLR 23 0.78 (0.93)DCIVLIB 23 0.10 (0.063)DPOLSTAB 23 2.07 (1.39)N 75 75 75 75 73 75 75 75 75Adj. R2 0.661 0.644 0.638 0.707 0.662 0.634 0.632 0.628 0.641

Dependent variable is the amount of debt relief per GDP in sub-period 3 (200004).Ds of the governance indicators are the relative changes of the average values of these indicators between the particular periods.Absolute z-values in parentheses.** Signicant at the 5% level.* Signicant at the 10% level.*** Signicant at the 1% level.

DEBTRELIEFAND

GOVERNANCEQUALITYIN

DEVELOPIN

GCOUNTRIES

75

Table 7. Two-step Heckman selection modeldebt relief and changing governance quality

Selection equation Outcome equation

I II III IV V VI VII I II III IV V VI VII

DebtperGDP

(sub-period 2)0.017*

(1.92)0.019**

(2.38)0.019**

(2.31)0.020**

(2.35)0.023**

(2.41)0.017**

(2.03)0.017**

(1.99)0.010***

(2.95)0.007*

(1.88)0.006*

(1.87)0.008***

(3.08)0.006*

(1.77)0.007**

(2.22)0.007**

(2.17)DRperGDP

(sub-periods1 and 2)

0.373***

(3.00)0.345***

(3.01)0.361***

(3.02)0.358***

(3.04)0.365**

(2.90)0.414***

(3.05)0.422***

(2.92)0.000(0.02)

0.002(0.88)

0.002(0.88)

0.002(0.14)

0.002(0.85)

0.002(0.81)

0.000(0.35)

POVERTY 0.031**

(2.24)0.030**

(2.29)0.031**

(2.27)0.030**

(2.22)0.036**

(2.23)0.043**

(2.47)0.034**

(2.32)0.007(0.91)

0.007(0.77)

0.004(0.47)

0.003(0.51)

0.001(1.17)

0.005(0.50)

0.000(0.08)

DGOVEFF 23 0.778(0.74)

0.122**

(2.61)DCONTROLC 23 0.244

(0.25)0.070(1.22)

DREGQUAL 23 0.588(0.69)

0.054(1.11)

DRULEOFLAW 23 0.775(0.75)

0.196***

(4.70)DHERITAGE 23 2.210

(1.46)0.097(1.45)

DVOICE 23 1.474(1.63)

0.064(1.61)

DPOLSTAB 23 0.910(1.43)

0.051* (1.82)

N 75 75 75 75 73 75 75 75 75 75 75 73 75 75Adj. R2 0.454 0.346 0.339 0.637 0.367 0.364 0.381

Dependent variable is the amount of debt relief per GDP in sub-period 3 (200004).Ds of the governance indicators are the relative changes of the average values of these indicators between the particular periods. Absolute t-values in parentheses.The correlation coecient between DebtperGDP and POVERTY is 0.44.* Signicant at the 10% level.** Signicant at the 5% level.*** Signicant at the 1% level.

76WORLD

DEVELOPMENT

eorts to improve institutional quality. Although our ndingsprovide hope that this will be the case, the expectations of the

debtor countries. This would provide a clear signal to the gov-

TES

4. For further details on the HIPC II Initiatives see Andrews, Boote,

Arslanalp and Henry (2005) who claim to deal with eciency, but rathermodel eectiveness. Eciency would imply that an objective is met with a

but identies those HIPCs as virtuous countries with satisfactory

12. See Rodrik, Subramanian, and Trebbi (2004) as well as Acemoglu,

UARizavi, and Singh (1999).

5. The concept of debt overhang was initially introduced by Sachs(1983). See also Sachs (1989). Krugman (1988) dened debt overhang as asituation in which the expected repayment on foreign debt falls short ofthe contractual value of the debt.

6. Tengstam (2006) provides a multi-period model to show that debtrelief stimulates adjustment, even in the absence of an initial debtoverhang, and questions the hypothesis that a too generous debt reliefmight reduce the adjustment eorts of developing countries.

7. Claessens (1990) generally conrms the existence of the debt Laercurve in a sample of 29 highly indebted Sub-Saharan African countries butnds only a handful on the wrong side of the inverted U-curve. Hansen(2001), recognizing a negative impact of the initial stock of external debtand debt service on growth for 54 developing countries, stresses that theserelationships become insignicant once some policy indicators are addedto the regression model.

8. The authors suggest that, at intermediate levels of debt, there is anegative relationship between the degree of indebtedness and economicgrowth. According to their study, the debt to GDP overhang lies between

25% and 40%. Once the debt irrelevance threshold is reached, thisrelationship disappears.Johnson, and Robinson (2005). Sachs (2003) questions the dominance ofinstitutions and claims that geographical conditions are of specialrelevance to economic development.

13. Even worse, debt-relief funds may be used to support activities thatactually worsen poverty, such as war . . . (Thomas, 2001, p. 42). However,the pleading for strong conditionality in order to force developingcountries to introduce reforms is not undisputed. Dollar and Svensson(2000), analyzing the failure of structural adjustment programs, claim thatthe role of donors is to identify reformers, not to create them.

14. Collier and Dollar (2002) claim that the diversion of aid from povertyreduction to policy improvement would only be justiable if there wasclear evidence that the oer of nance was eective in inducing policyimprovement. The authors nd evidence to the contrary: nance seems tobe rather ineective because it impairs government ownership in theprocess of policy reform. Bigsten (2006) argues that the external incentivesto produce good results will be supported by a system where the chances ofreceiving aid from a common pool really depends on whether one hasdelivered good policies and institutional improvements during the earlierphases of development. Therefore, one could claim for a change ofconditionality from an ex-ante incentive-based approach to a selectivityrelief (Paris Club, 2006a).5. CONCLUSIONS

Analyzing the determinants of debt relief programs in the1990s, we derived a standard result of international politicaleconomy. Governments of creditor countries have granteddebt relief because of political rather than economic reasoning.Political rationality outreached economical rationality inthe 1990s. In particular, we can emphasize path dependencewith respect to debt relief granted. However, debt relief pro-grams since 2000 seem to be positively inuenced by economicand institutional development. This may be due to applyingthe successful learning process of donor countries govern-ments and a slight change in the allocation pattern of debt re-lief, along with the introduction of some sensible criteriaduring the last decade. Recent debt relief seems to beat leastpartlydriven by the improvement of governance structuresin developing countries. It is crucial to closely assess the sus-tainability of institutional reforms. An improvement withinve years is a good beginning but not a guarantee of a long-term and lasting change.Analyzing debt forgiveness within the framework of the En-

hanced HIPC Initiative, one can nd a relation between grants

NO

1. We do not distinguish between these initiatives, but look at theaggregate debt relief granted to single debtor countries.

2. All in all, the agreements that have been reached by the members ofthe Paris Club since the mid-1980s have covered an amount of more than$500 billion so far. Of course, the amount of debt that has actually beenforgiven falls far behind the amount negotiated.

3. Debt treatments are applied only for countries that need a resched-uling and that implement reforms to resolve their payment diculties. Inpractice, conditionality is provided by the existence of an appropriateprogramme supported by the IMF, which demonstrates the need for debt

DEBT RELIEF AND GOVERNANCE Qgovernance quality that reached the decision point before 2000.

11. For an application (to the G8s initiative to bridge the global digitaldivide) see Freytag (2003).minimum of resources. This question is barely discussed in the literature.

10. Berthelemy (2004) does not measure the initial governance quality9. The literature concentrates on eectiveness, one exception beingernments of developing countries and create incentives forinstitutional reforms while strengthening the ownership ofthese reforms at the same time.impact of the MDRI should be kept modest. The eects will belong-term and probably dicult to measure. 40

Given the overwhelming importance of decent institutionsand good governance for economic development, donor coun-tries should strengthen the selectivity approach and rewardsound policies and improvements of governance quality inand institutional quality. During the decision-making pro-cesses of creditor countries and International Financial Insti-tutions, governance quality andprobably mostimportantrelated improvement are eventually assessed. Thisis a very promising sign with respect to development prospectsin highly indebted poor countries. Before this result is takenfor granted, however, more research is necessary. It also re-mains to be seen whether or not the G8s Gleneagles Multilat-eral Debt Relief Initiative (MDRI) is also driven by rationaldecisions that take into account governance quality or at least

LITY IN DEVELOPING COUNTRIES 77approach that takes into account performance improvements. See alsoNissanke and Ferrarini (2004, p. 46).

as the basis for international trade, according to the HeckscherOhlin

developing countries are labor and land abundant, opening world marketsfor labor and land intensive goods could generate massive and extensive cannot be recovered to any signicant degree. This, indeed, is true for debt

POLSTAB) are positive but insignicant as well.

HIPC. This factor is introduced into the initial regression model (second

freed from this eect and the regression analysis produces their unbiased

E

VEwelfare gains. This does not say that debt relief is useless in any poorcountry. The evidence, however, suggests that debt relief is more helpfulfor reducing the debt overhang in middle-income countries (Arslanalp &Henry, 2006), and that poor countries are poor mainly because of poorgovernance (Easterly, 1999).

16. The fact that a country exports oil can be interpreted as economicproximity to major OECD countries, which consume the largest share ofthe worlds oil production. Barro and Lee (2005) suggest that economicproximity to the United States and major Western European countries ispositively related to the probability and the size of IMF loans granted to aspecic country. The oil abundance of Iran may be one reason for theintensive negotiating eorts undertaken by the EU to solve the problem ofIrans nuclear strategy.

17. Although some HIPCs received debt relief in the HIPC Initiativeframework in the second sub-period, the vast amount of debt forgivenesshas been delivered in the third sub-period.

18. For further details see The World Bank, 2006.

19. For a documentation of the methodology see Freedom House (2005).

20. For the methodology of aggregating governance indicators seeKaufmann et al. (KKM) (2005) and Kaufmann, Kraay, and Zoido-Lobaton (1999). For the data see WGI (2006).

21. Interestingly, the correlation between the Fraser Index and most ofthe other institutional variables is relatively low, especially in the secondsub-period. The coecients of correlation are signicantly higher in thethird sub-period but still do not indicate a strong correlation.

22. Gwartney, Lawson, and Gartzke (2005) provide documentation ofthe methodology.

23. We used T-tests and MannWhitney U-tests. Results can be deliveredon request.

24. We include the seven HIPCs that reached the completion point after2004 in the group of the late completion point countries.

25. We used MannWhitney U-tests and KruskalWallis tests. Resultscan be delivered on request.

26. The indicator DRULEOFLAW narrowly reaches weak signicance.

27. Neumayer (2002, p. 920), using the same technique to prove if goodgovernance has been rewarded, gives a similar justication.

28. The variables DebtperGDP1 and DRperGDP1 are only moderatelycorrelated (0.52).

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Acemoglu, D., Johnson, S., & Robinson, J. (2005). The rise of Europe:Atlantic trade, institutional change, and economic growth. AmericanEconomic Review, 95(3), 546579.Addison, T., & Rahman, A. (2004). Resolving the HIPC problem: Is goodpolicy enough? In T. Addison, H. Hansen, & F. Tarp (Eds.), Debt relieffor poor countries (pp. 105120). Basingstoke, Hampshire et al.:Palgrave Macmillan.

Ahmed, M., Lane, T., & Schulze-Ghattas, M. (2001). Refocu-40. This has been correctly stated by Moss (2006).

NCEScoecients.

39. Results can be delivered on request.step) and serves as a control for the omitted variable in the regressionmodel. Since we have a control factor in the analysis for the inuence ofthe HIPC status on debt relief, the other predictors in the equation are38. The Heckman method can be used as a correction for possible sampleselection bias. Heckman selection models consist of two steps. In the rststep, a selection equation (probit model) is dened. The variable derivedfrom the selection equation (inverse Mills ratio) reects the eect of theunmeasured characteristics that are related to the countrys status as a35. The introduction of this variable reduces the sample size. Thecorrelation between POVERTY and the debt burden (irrespective of themeasure applied) is rather low.

36. In some cases, this might be dierent for bilateral transfers, which wedo not analyze separately.

37. The coecients of the other governance indicators (e.g., CIVLIB andrelief and ODA payments granted in the past.

31. It should be mentioned that, in addition to these interesting results,we do not nd evidence for a crowding out of ODA by debt relief in the1990s, at least not in the highly indebted countries.

32. The coecients for CIVLIB, POLSTAB, and VOICE are alsoinsignicant.

33. This may be dierent if one looks at bilateral relations betweencreditors and debtors. However, if colonial ties played a major role in theallocation decisions of creditors, one should nd a relationship betweenthe colonial status and debt relief in aggregated data, since not everydeveloping country in our sample has a colonial history.

34. Additionally, we run regressions for the non-HIPCs and HIPCsseparately. The results must be interpreted with caution because of thesmall samples sizes and reduced degrees of freedom. We do not record theresults here. However, they suggest that the path dependence in the case ofthe non-HIPCs becomes much less important in the third sub-period. Inthe case of the HIPCs, the coecient for past debt relief remains positiveand highly signicant. Interestingly, the coecient for the relative debtstock becomes insignicant for the sub-sample of HIPCs.trade theory, stem from dierent factor endowments. Since many30. Sunk costs are costs that have already been incurred and which15. HeckscherOhlin goods are characterized by rather basic, publiclyavailable, and relatively stable technologies. The comparative advantages

78 WORLD DE29. Using the initial indebtedness at the beginning of the second sub-period as an alternative explanatory variable produces very similar results.

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Alesina, A., & Weder, B. (2002). Do corrupt governments receive lessforeign aid?. The American Economic Review, 92(4), 11261137.

Andrews, D., Boote, A. R., Rizavi, S. S., & Singh, S. (1999). Debt relief forlow-income countries: the enhanced HIPC Initiative. IMF PamphletSeries No. 51. Washington, DC: International Monetary Fund.

Arslanalp, S., & Henry, P. B. (2005). Is debt relief ecient? The Journal ofFinance, 60(2), 101