It's been 14 years since the launch of the initiative to cancel the foreign debt of 40 heavily indebted and poorest countries (Heavily Indebted Poor Countries - HIPC Initiative) and 10 years after large mobilization initiated by civil society on the occasion of the Jubilee. Although, since 2006, many HIPC countries have since canceled most of its debts, the future scenario is not without pitfalls and maintain the sustainability of public debt is still difficult to reach a goal, such as the recent global financial crisis is highlighting.
This short note considers two key issues - the role of domestic debt and the evaluation of the effects of debt cancellation - in order to propose an alternative approach to debt reduction, less general and more tailored to the characteristics of individual countries. For reasons of space, are not taken into account many other issues - the odious debt, the choice between loans and grants, vulture funds, access to international capital markets - which put at risk the sustainability of debt poor countries, on which refers to Arnold and Priest (2010) [2] .
The first question that deserves to be addressed is that of domestic debt. The increasing recourse to domestic financing in the capital market can be defined as an unintended consequence of the HIPC Initiative: given the limits imposed by the program to borrow on international capital markets and the structural fiscal deficits, many countries have had no choice but to issue bonds on the domestic market. In the macroeconomic environment that characterizes most of the HIPCs - very volatile and unstable economic policies and weak institutions - domestic debt is extremely expensive and can crowd out investment and social spending, inducing a contraction of bank credit and limit, at least in part, progress with debt relief. In addition, interest payments on domestic debt, much higher than that on foreign loans granted at preferential rates, could undermine the sustainability of public debt. In Zambia, for example, in 2004 the interest payments on domestic debt amounted to five times that on foreign debt and 10 percent of tax revenue (including aid). Only in 2005 the World Bank and the IMF have begun to take this into account, including - even if partial - the domestic debt in the Debt Sustainability Framework renewed.
At present, however, it is desirable to adopt a broader approach that considers the dynamics of the whole debt to derive the conditions for sustainability at the time also guide the lending policies. To do this you need to invest resources in the collection of reliable, comparable and detailed on the internal public debt of poor countries. More generally, this effort must be part of a vast project that aims at making available data on social spending and poverty reduction, as well as to assess the effectiveness of debt relief.
In this regard, it should be noted that the lack of quantitative information (especially on output rather than input on ) is one of the main reasons that still make it difficult for a rigorous assessment of the results of debt cancellation in terms of improved health, access education and poverty reduction. The available data show that, on average, spending on poverty reduction has increased during the years of the HIPC initiative, although the picture is very mixed - many countries are still lagging dramatically - and very little is possible to know the results ( you know that you spend more on education, but do not know if and what has reduced drop-out rate). In any case, it is important that expectations are revised downwards: given the resources at stake (the whole debt cancellation costs little more than what is spent annually in development assistance), debt relief can not be seen as the solution to eradicate poverty or achieve the Millennium Development Goals.
addition, a direct assessment of the impact of debt relief in poor countries does not highlight the presence of any acceleration in the rate of growth of GDP, or of an investment boom [3 ] . The poor results obtained so far can be explained by the fact that in many countries the high external debt is not necessarily the main constraint to economic growth. In fact, while the empirical evidence to support the debt Laffer curve (the relationship that, over a certain threshold, the marginal contribution of foreign debt to growth becomes negative) is extremely weak, on the other hand it is clear that a high debt has a negative effect on productivity growth and income only in countries that implement prudent economic policies and institutions that have good [4] . In contrast, where policies are unstable and the institutional framework is weak, these factors are the main cause of poor growth, not debt, which is only a symptom.
In conclusion, these two aspects imply the need to review the policies of debt relief according to a line that follows an approach of "diagnostic growth " [5] : debt reduction must be country-specific is only addressed to those countries for which the debt is a real constraint to investment and development. In addition, international institutions and civil society should move from a paradigm based on the stock of foreign debt a new approach based on the total debt and evaluating the effect that not only the stock of debt, but also flows Interest payments have on the economies of HIPC countries. Given the importance of domestic debt and the increasing use of commercial credit and non-subsidized loans from many countries, policies and responsible lending, for the development should take into account the interest payments can not exceed a certain percentage (fixed or flexible) of GDP.
Provide debt relief to countries with good policies and strong institutions in a context in which the eligibility criteria are quantifiable, realistic and public ex-ante would not only be economically efficient - maximizing the benefits of reduced debt at a time when development resources are less and less - but also provide the right incentives. In this context, debt relief can act as a pull mechanism (instead of push ) that encourages poor countries to improve the institutions and macroeconomic policies. From this point of view, some preliminary results are encouraging and highlight that, when the multilateral institutions have become part of the movement for debt relief, this is associated with an improvement in macroeconomic management and governance countries beneficiaries. Finally, the support of the international community in other HIPC countries should be oriented to promote institutional reforms and to identify and eliminate the key constraints to economic growth.
Andrea Priest
originally appeared on: nelmerito.com
[1] Polytechnic University of Marche - Department of Economics and MoFiR CeMaFiR. E-mail: @ a.presbitero univpm.it ; personal webpage: https: / / sites.google.com / site / priest /
[2] Arnone, M. and Priest, AF 2010. Debt Relief Initiatives: Design and Policy Outcomes (Foreword by Nancy Birdsall, Preface and Afterword by Ugo Panizza by Aart Kraay), Global Finance Series, Farnham: Ashgate. On the role of vulture funds, see, on the merito.com: Arnone and Priest (2008)
[3] Priest, AF 2009. Debt-Relief Effectiveness and Institution-Building, Development Policy Review, 27 (5) :529-559; Moss, T . 2006. Wil the Deb t Relie f Mak e a Difference ? Impac t an d Expectation s o f th e Multilatera l Deb t Relie f Initiative , Cente r fo r Globa l Development Workin g Pape r , 8 8; Depetri s Chauvin , N. an d Kraay, A . 2005 . Wha t Ha s 10 0 Billio n Dollar s Wort h o f Deb t Relie f Don e fo r Low-Incom e Countries? , manoscritto, Th e Worl d Bank . Some preliminary evaluation of the effects of debt relief in terms of outcomes are in: Primo Braga, CA and Domeland, D. 2009. Debt Relief and Beyond: Lessons Learned and Challenges Ahead , Washington, DC: The World Bank.
[4] Priest, AF 2008. The Debt-Growth Nexus: a Reassessment , Economics: The-Open-Access, Open-Assessment E-Journal, 2 (2008-30), Priest, AF 2010. Total Public Debt and Economic Growth in Developing Countries , MoFiR working paper No. 44.
[5] Hausmann, R., Rodrik, D. and A. Velasco 2005. Diagnostics Growth, manuscript, John F. Kennedy School of Government, Harvard University.
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