Multilateral Debt Relief: A Promising Instrument to Increase Pro-Poor Public Expenditure?

Abstract: This paper seeks to examine the extent to which the debt cancellations under the HIPC Initiatives have met their objective of reducing poverty by increasing public sector expenditure on healthcare and education (so called pro-poor spending) over the period of 1996-2005. There are mainly two reasons to believe that the debt relief efforts will enable increased social spending (i) the debt cancellations will reduce debt servicing, thus freeing up resources which can be used for social improvements, and (ii) the pro-poor expenditure condition that follows from the design of the Enhanced HIPC, will enable donors to influence the allocation of government resources. Based on a cross-country analysis over the period of 1996-2005, I find that the recent debt relief efforts are positively correlated with the share of public resources directed to the health and education sectors, particular with expenditures on health. However, rather then being an outcome of increased budgetary space; my results indicate that the factor that seems to determining the increase of public spending in the HIPCs are the conditions arising from the Poverty Reduction Strategy Paper, attached to the Enhanced HIPC Initiative (E-HIPC). Since the underlying explanation behind the positive correlation seems to be found in the incentive structure embedded in the E-HIPC initiative, it seems to be very unlikely that the complete cancellation of debt stocks under the MDRI and the resulting loss of conditionality, will lead to the long term goal of increased social expenditures.