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Debt Relief and Good Governance: New Evidence

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  • Freytag , Andreas
  • Pettersson, Jonatan
  • Schmied, Julian

Abstract

Debt relief has been an instrument of development cooperation for almost 50 years. Its track record is mixed at best, and its drivers were mainly political during its practice. However, in the early 2000s, the HIPC Initiative increased the economic rationality remarkably, because LDCs had to deliver before they were relieved from their debt. Since then, debt as well as its relief has fallen significantly. In addition, the recipient countries have changed, more fragile countries are among the top recipients. We discuss the hypothesis that debt relief has changed another time; it nowadays seems to be – at least partly – a diplomatic instrument. We find that there is no significant improvement of governance quality within our sample of developing countries. Our regression results show that improvements in governance quality lead to higher level of debt forgiveness in 2000-2004 but not in the subsequent periods. Instead, we find that debt relief is determined by governmental spending behavior of the creditor country, which in turn can be explained by the fractionalization of the government. The analysis uses data from 1995 to 2013 and applies a 2-Step-Heckman filter model and a panel model with fixed country and year effects.

Suggested Citation

  • Freytag , Andreas & Pettersson, Jonatan & Schmied, Julian, 2016. "Debt Relief and Good Governance: New Evidence," VfS Annual Conference 2016 (Augsburg): Demographic Change 145914, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc16:145914
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    JEL classification:

    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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