Debt Relief and Beyond

Debt Relief and Beyond

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The history of debt relief goes back several decades. It reveals that a country's accumulation of unsustainable debt stems from such factors as deficiencies in macroeconomic management, adverse terms-of-trade shocks, and poor governance. Debt-relief initiatives have provided debt-burdened countries with the opportunity for a fresh start, but whether the benefits of debt relief can be preserved depends on transformations in a country's policies and institutions.
In 1996, the Heavily Indebted Poor Countries (HIPC) Initiative was launched as the first comprehensive, multilateral, debt-relief framework for low-income countries. In 2005, the Multilateral Debt Relief Initiative was established, which increased the level of debt relief provided to HIPCs. As of early 2009, assistance through these two initiatives had been committed to 35 countries and amounted to US$117 billion in nominal terms, or half of the 2007 GDP of these countries.
'Debt Relief and Beyond' assesses the implications of debt relief for low-income countries and how its benefits can be preserved and used to fight poverty. The chapter authors bring unique operational experience to their examination of debt relief, debt sustainability, and debt management. Several key questions are addressed, including, what consequences does debt relief have for poverty-reducing expenditures, growth, and access to finance? Can debt relief guarantee debt sustainability? How can debt management at all levels of government be improved? What lessons can be learned from countries that have experienced debt restructuring? Finally, this book provides sound empirical evidence using current econometric techniques.

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Primo Braga, Dömeland
AND
DEBT RELIEF BEYOND
The history of debt relief goes back several decades. It reveals that a country’s accumulation of unsustainable
debt stems from such factors as defi ciencies in macroeconomic management, adverse terms-of-trade shocks, and
poor governance. Debt-relief initiatives have provided debt-burdened countries with the opportunity for a fresh
start, but whether the benefi ts of debt relief can be preserved depends on transformations in a country’s policies
and institutions.
In 1996, the Heavily Indebted Poor Countries (HIPC) Initiative was launched as the fi rst comprehensive,
multilateral, debt-relief framework for low-income countries. In 2005, the Multilateral Debt Relief Initiative
was established, which increased the level of debt relief provided to HIPCs. As of early 2009, assistance
through these two initiatives had been committed to 35 countries and amounted to US$117 billion in nominal
terms, or half of the 2007 GDP of these countries.
Debt Relief and Beyond assesses the implications of debt relief for low-income countries and how its benefi ts
can be preserved and used to fi ght poverty. The chapter authors bring unique operational experience to their
examination of debt relief, debt sustainability, and debt management. Several key questions are addressed,
including, what consequences does debt relief have for poverty-reducing expenditures, growth, and access to DEBT RELIEF fi nance? Can debt relief guarantee debt sustainability? How can debt management at all levels of government be
improved? What lessons can be learned from countries that have experienced debt restructuring? Finally, this
book provides sound empirical evidence using current econometric techniques.
AND
For years, debt relief has been extended to poor countries in the belief that they would then be enabled to grow more BEYOND
rapidly and use the resources thus freed for the poor. In this important volume, the contributors undertake systematic
analyses of the effects of debt relief. The book is a major contribution to our understanding of how effective debt relief is
as a means of combating poverty, and should be required reading for all those in the development community.
ANNE O. KRUEGER, Professor of International Economics,
Paul Nitze School of Advanced International Studies, Johns Hopkins University;
Herald L. and Caroline L. Ritch Professor Emeritus, Economics Department, Stanford University
It is hard to fi nd issues of similar worldwide importance to those discussed in this book. Debt Relief and Beyond
addresses questions that are key to the pursuit of global peace and justice in a globalized world. The tools
described will undergo a harsh test of their practicability due to the global fi nancial crisis. Accordingly, this book is
an important, but certainly not the ultimate, step in the evolving debate about debt and development.
CHRISTOPH G. PAULUS, Dean of the Law School and Professor of Law, Humboldt University at Berlin
Lessons Learned
This book takes up many of the critical issues concerning future policies in the HIPC countries. At their heart is
the concern, how can low-income countries avoid repeating the cycle of borrowing themselves into unsustain- and Challenges Ahead
ability? Countries that can see light at the end of the tunnel (and who would have thought three decades ago that
the likes of Bangladesh and India would now be emerging?) will fi nd much good advice here. Our worries need
to focus on the countries that are not yet in this position and for which additional grant aid is the only option.
JOHN WILLIAMSON, Senior Fellow, Peterson Institute for International Economics
ISBN 978-0-8213-7874-8
Edited by
Carlos A. Primo BragaSKU 17874
Dörte DömelandDebt Relief and BeyondDebt Relief and
Beyond
Lessons Learned and
Challenges Ahead
Edited by
Carlos A. Primo Braga
Dörte Dömeland© 2009 The International Bank for Reconstruction and Development / The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
E-mail: feedback@worldbank.org
All rights reserved
1 2 3 4 12 11 10 09
This volume is a product of the staff of the International Bank for Reconstruction and Devel-
opment / The World Bank. The findings, interpretations, and conclusions expressed in this
volume do not necessarily reflect the views of the Executive Directors of The World Bank or
the governments they represent.
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ISBN: 978-0-8213-7874-8
eISBN: 978-0-8213-7875-5
DOI: 10.1596/978-0-8213-7874-8
Cover design: Edelman Design Communications
Cover photo: © Manuel Ribeiro
Library of Congress Cataloging-in-Publication Data
Debt relief and beyond: lessons learned and challenges ahead / Carlos A. Primo Braga and
Dörte Dömeland (editors).
p. cm.
Includes bibliographical references and index.
ISBN 978-0-8213-7874-8 — ISBN 978-0-8213-7875-5 (electronic)
1. Debt relief—Developing countries. I. Braga, Carlos Alberto Primo, 1954- II. Dömeland,
Dörte, 1971- III. World Bank.
HJ8899.D4383 2009
336.3'435091724—dc22
2009020887Contents
Preface xiii
Acknowledgments xv
Contributors xvii
Abbreviations xxi
Introduction 1
Dörte Dömeland and Carlos A. Primo Braga
Part I: Debt Relief 9
1 Debt Relief to Low-Income Countries: A Retrospective 11
Boris Gamarra, Malvina Pollock, and
Carlos A. Primo Braga
2 Debt Relief and Education in Heavily Indebted
Poor Countries 35
Jesús Crespo Cuaresma and Gallina Andronova Vincelette
3 Is Debt Relief Good for the Poor? The Effects
of the HIPC Initiative on Infant Mortality 49
Juan Pedro Schmid
4 Drivers of Growth in Fragile States: Has the
HIPC Process Helped Fragile Countries Grow? 71
Luca Bandiera, Jesús Crespo Cuaresma, and
Gallina Andronova Vincelette
Part II: Debt Sustainability 91
5 Debt Sustainability in Low-Income Countries:
Recent Experience and Challenges Ahead 93
Christian Beddies, Dörte Dömeland,
Marie-Hélène Le Manchec, and Henry Mooney
vvi contents
6 Debt Relief and Sustainable Financing to Meet
the MDGs 117
Dörte Dömeland and Homi Kharas
7 Sovereign Default Risk and Private Sector Access
to Capital in Emerging Markets 141
Udaibir S. Das, Michael G. Papaioannou, and
Christoph Trebesch
8 Lessons from Market-Access Countries on
Public Debt Sustainability and Growth 181
Brian Pinto and Mona Prasad
Part III: Odious Debt 203
9 The Concept of Odious Debt: Some Considerations 205
Vikram Nehru and Mark Thomas
10 Odious Debt as a Principal-Agent Problem 229
Frederico Gil Sander
11 The Economics of Odious Debt 261
Dörte Dömeland, Frederico Gil Sander, and
Carlos A. Primo Braga
Part IV: Debt Management 293
12 Government Debt Management in Low-Income
Countries 295
Phillip Anderson and Eriko Togo
13 Debut Sovereign Bond Issues: Strategic Considerations
and Determinants of Characteristics 313
Udaibir S. Das, Michael G. Papaioannou, and
Magdalena Polan
14 Subnational Debt Management by Low-Income
Countries in Transition to Market Access 343
Lili Liu, Abha Prasad, Francis Rowe, and Signe Zeikate
15 Managing Volatility: Fiscal Policy, Debt Management,
and Oil Revenues in the Republic of Congo 373
Nina Budina, Sweder van Wijnbergen, and Ying Licontents vii
16 Debt-Swap Mechanisms Revisited: Lessons from
the Chilean Experience of the 1980s 405
Leonardo Hernández
Index 427
Boxes
1.1 The Paris Club 12
1.2 Key Features of the HIPC Initiative 26
1.3 Key Features of the Multilateral Debt Relief Initiative 29
8.1 What Factors Affect a Country’s Level of Debt? 185
9.1 The Stolen Assets Recovery (StAR) Initiative 218
11.1 Noga vs. the Russian Federation 270
12.1 Principles of Sound Practice in Public Debt Management 300
12.2 Steps in Establishing an Effective MTDS 307
13.1 IMF Policy on Nonconcessional External Debt
Financing to HIPCs 318
13.2 Determinants of the Size and Cost of Debut Bond Issues 322
14.1 Autonomy and Regulation in Issuing Subnational
Debt in India 361
Figures
1.1 Debt Stock of Post–Decision Point HIPCs at Different
Stages of Debt Relief 30
2.1 Average Educational Variables in HIPCs at Each
Stage of the HIPC Initiative Process 40
2.2 Primary School Dropout Rates in Post–Completion Point
HIPCs before and after Reaching the Completion Point 41
2.3 Secondary School Repetition Rates in
Post–Completion Point HIPCs before and after
Reaching the Completion Point 42
2.4 Distribution of Education Expenditures in Pre–Decision
Point, Interim, and Post–Completion Point HIPCs 43
2.5 Composition of Expenditures on Primary, Secondary,
and Tertiary Education in HIPCs as a Percentage of Total
Education Expenditures: Empirical Distribution Functions 44
3.1 Median Births Attended by Skilled Health Staff in
Low-Income Countries at Different Stages of the
HIPC Initiative, 1995–2000 and 2003–07 53
3.2 Median Immunization Coverage of DPT in
Low-Income Countries around Decision Point
at Different Stages of the HIPC Initiative 54
3.3 Median Access to Improved Sanitation Facilities in Rural
Areas in Low-Income Countries at Different Stages of the
HIPC Initiative, 1995, 2000, and 2006 54
3.4 Infant Mortality Rates in Low-Income Countries at Different
Stages of the HIPC Initiative 57viii contents
4.1 Groups of Fragile States and HIPCs 72
4.2 Selected Macroeconomic Indicators in Fragile
States and HIPCs, 1992–2006 76
4.3 Annual Growth of per Capita Income in Fragile
States and HIPCs, 1992–2006 77
4.4 CPIA and Governance in Fragile HIPCs and Non–HIPCs 78
5.1 Risk of Debt Distress in HIPCs 100
5.2 Distribution of Present Value of Debt-to-Exports
Ratio in HIPCs, end-2007 101
5.3 Risk of Debt Distress in Post–Completion Point
HIPCs, 2005/06 and 2007/08 103
5.4
Ratio in HIPCs, 2007 and 2017 104
5.5
HIPCs and Low-Income Non–HIPCs 105
5.6 Distribution of Present Value of Debt-to-Exports
Ratio in Completion Point HIPCs and Low-Income
Non–HIPCs, end-2007 106
5.7 alue of the Debt-to-Exports
Ratio in HIPCs 108
6.1 Description of the HIPC Initiative Process 120
6.2 Net ODA to Low-Income Countries, 1980–2006 123
6.3 Net ODA Flows to Post–Completion Point, Interim,
and Pre–Decision Point Countries, 1980–2006 125
6.4 Annual Real GDP Growth in Post–Completion
Point HIPCs, Interim HIPCs, and Non–HIPCs,
1990–2004 127
6.5 Debt Decomposition in Post–Completion Point HIPCs,
Interim HIPCs, and Non–HIPCs, 1999–2007 130
6.6 CPIA Index for Low-Income Countries, 1999–2006 134
6.7 CPIA Index without Debt-Policy Component in HIPCs
before and after Completion and Decision Points 135
6.8 Progress toward Meeting the MDGs in
Low-Income Countries 136
7A.1 Bond, Syndicated Loan, and Equity Issuance by Private
Domestic Firms in Emerging Markets, 1993–2007 166
8.1 Maastricht Debt-to-GDP Ratio Criterion and Ratios
in Argentina, India, and Russia, 1996–2007 192
10.1 Sequence of Actions in an Infinitely Repeated
Game with Three Subperiods 239
10.2 Relationship between Level of “Ego Rents” and
Required Transfer to Government 242
11.1 Conflicts of Interest in Sovereign Debt 262
12.1 Early Results from the DeMPA Tool: Core Functions
and Debt Management 305
13.1 Characteristics of Debut Issues by Emerging-Market
and Low-Income Countries, 1996–2008 317