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

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

growthEconomicImpact 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 : –Bolivia, Jamaica, Nicaragua, Peru –Mozambique, Tanzania, Uganda, Zambia

Comparison of results StockFlowConditionalityGrowth Bolivia++0+ Jamaica++0+ Nicaragua0000 Peru++00+ Mozambique0000 TanzaniaO000 UgandaO000 ZambiaO000 Depetris00NA, +0 Presbitero0NA 0 Johansson00NA0

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