1. The Effect of Debt Forgiveness on Transparency
Caitlin Garrabrant
Katerina Mamay
Prof. Vreeland
October 14, 2014

2. Research Question and Hypothesis
Transparency
Katerina
Research question: Does debt forgiveness (independent) or reduction incentivize countries to increase their economic transparency(dependent)?
Our hypothesis is that some programs cause countries to increase transparency before and during their participation in debt relief programs.
Debt forgiveness

3. What is Transparency? HRV Index- How is it measured?
Conditionality and Debt Forgiveness
Robin Theobald and Conditionality in Africa
Caitlin
HRV treats transparency as a latent predictor of the reporting of data to the World Bank’s World Development Indicators. (based on how much information was provide to data bases such as the World Bank.)
The index is a continuous scale ranging from -10 to 10, or least transparent to most transparent, respectively.)
Why do multilateral organizations often impose conditionality requiring improvements in transparency as a condition of aid agreements? The effects of low levels of transparency may benefit a particular corrupt regime while hurting the nation as a whole. Some research by Weber’s shows that stock-flow adjustments, or the annual discrepancy between change in government debt and budget deficit, are larger in less transparent countries. In other words, She hypothesizes that it is easier for less transparent regimes “to engage in deceptive fiscal stratagems”.   Therefore, the IMF and World Bank impose conditions regarding improvements in transparency in order to avoid such “deceptive fiscal stratagems”.
Robin Theobald: Robin Theobald argues that international financial institutions offering conditional debt relief can greatly influence indebted African countries to improve their economic and governmental transparency.

4. Literature Review Eric Neumayer’s research
Nicholas Chauvin and Aart Kraay
How is our research different?
Katerina
1- Eric Neumayer’s research: countries with good governance do not receive more aid. (transparency does not have an impact on debt forgiveness)
2- Nicholas Chauvin and Aart Kraay: Debt relief is more dependent on policies and less dependent on per capita income and total national debt than other forms of aid. (transparency does have an impact on debt forgiveness) \
3- We use transparency as our dependent variable. We are not investigating the effect of transparency on debt forgiveness, but how participation in debt relief programs affects transparency.

5. Data 125 countries (1980-2010) Observations: 2103
Debt forgiveness mean:
million constant 2005 United States dollars
-WDI
Transparency mean:
(HRV index)
Caitlin
*Mean given that there was debt forgiveness

6. Method Control Variables: -Political Regime -GDP per capita
-Country and year fixed effects
Controlling for total central government debt
Katerina
Political Regime HRV demonstrate that democracies tend to have higher levels of transparency
They also find that nations with higher GDP per capita have higher transparency. In other words, transparency is positively correlated with both democracy and GDP
We choose not to control for total central government debt due to the fact that we run country and year fixed-effects regressions.  These regressions create a control for general level of indebtedness among nations and time periods.  Using total central government debt as an additional control variable is so stringent that it is impossible to find significant variations in the effect of debt forgiveness on transparency.

7. Regression Results
Very slight positive correlation between debt forgiveness and transparency.
Statistical significance at different income thresholds
Correlations of control variables
Caitlin
This finding is statistically significant at the 0.01 level when GDP per capita is less than $4000 per year, even when controlling for country- and year- fixed effects.  The finding ceases to be statistically significant at a 0.1 level when the GDP per capita threshold is raised to approximately $6000 per year or higher.  
Positive correlation between democracy and transparency (Consistent with Vreeland’s work). Small correlation with GDP probably because we have a very small threshold
Therefore, the data support our initial hypothesis of a positive causal relationship between debt forgiveness and transparency levels of developing nations, but the effect is not substantial and only significant for very poor countries

10. Before, During, and After Variables
Katerina
Three years before and after
As hypothesized, transparency levels are greatest during the years in which a country receives debt forgiveness. transparency is lower after receiving debt forgiveness than it was before.  Countries do not maintain increased levels of transparency when no longer required to satisfy debt restructuring conditions.  
The drop in transparency after the program ends is actually greater than the previous gain, resulting in a net negative change.

11. Case Studies Benin: - HIPC 1998-2003 Zambia - HIPC 2000-2004
*Both countries increased transparency before and during participation in the HIPC Initiative.
*Transparency levels dropped after completion.
Caitlin
*Explain why we chose these two cases (Participated in the HIPC Initiative, which is currently the most important debt relief initiative by the Bretton Woods Institutions. Benin and Zambia represent two of many instances where countries that participated in this initiative changed their levels of transparency. They are also both in Africa, where Robin Theobald suggested that conditionality applied to debt relief programs could be used as a tool to increase transparency) **

12. So What?

13. Implications Does reform last?
Are debt relief programs effective policy tools?
Caitlin and Katerina
-suggest that changes in transparency may be related to conditions impacting a country’s eligibility for a debt reduction initiative
-institutional changes under debt reduction programs do not truly reflect a desire for reform
*It is obvious that countries in need are willing to meet the conditions necessary to reduce their debt. Our research poses the question of whether debt relief is an effective tool for political reform.  The results indicate that current systems of conditionality in debt forgiveness are ineffective in the long term, thus challenging the donor countries and institutions to discern which countries make long-lasting reforms as opposed to temporary adjustments.  

14. Thank you