Methodology for evaluating debt relief

Geske Dijkstra

Erasmus University Rotterdam and Policy and Operations Evaluation

Department (IOB), MoFa, NL

Overview

• What is debt relief

• Theory-based evaluation

• Alternative method: cross section econometrics

• Comparison of results

• Conclusion: strength and weaknesses of theory-based evaluation

What is Debt Relief?

Relief on sovereign debts provided by official creditors:

• On debt service (flows) or on debt stocks

• Rescheduling versus cancellation• Type of creditor:

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

– Multilateral– Private

Theory

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

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

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

Debt overhang:The debt Laffer curve

Debt

Expected debt payments

O

A

B

45°

Intervention theory debt relief

Debt relief may increase growth and poverty reduction through three channels:

•A reduction in debt stock

•A reduction in debt service flow

•Through policy conditions attached to debt relief agreement

growthEconomic Impact

Flow effects: government investment

Stock effects: creditworthiness, private investment

Outcomes

Policy changeIncrease in flow of resources

Reduction of debt stock

Outputs

Policy conditions

modalitiesDifferentInputs

ConditionalityFlowStock

Intervention logic debt relief

Alternative method: Econometrics

• Effect of debt relief on growth, investment, government spending

• Via difference-in-difference method (Depetris Chauvin & Kraay ’05, Presbitero ‘09), or standard growth regression

• Debt relief: present value of debt reduction, plus (Johansson ‘10) estimated reduction in market value of debt

Theory-based evaluation of debt relief in the 1990s

• IOB 2003, also in Dijkstra 2008: Evaluation of debt relief to 8 countries 1990-1999:– Bolivia, Jamaica, Nicaragua, Peru– Mozambique, Tanzania, Uganda, Zambia

Comparison of resultsStock Flow Conditionality Growth

Bolivia + + 0 +

Jamaica + + 0 +

Nicaragua 0 0 0 0

Peru ++ 0 0 +

Mozambique 0 0 0 0

Tanzania O 0 0 0

Uganda O 0 0 0

Zambia O 0 0 0

Depetris 0 0 NA, + 0

Presbitero 0 NA NA 0

Johansson 0 0 NA 0

Conclusion on theory-based evaluation

• Strength: can take into account:– Different debt relief modalities– Different channels of influence, including

conditionality channel

• Weaknesses:– Attribution of outputs possible, outcomes

more difficult; impact via theory – Impact cannot be quantified