THE JOURNAL OF ENERGY

AND DEVELOPMENT

Henri Atangana Ondoa, Dickson Thomas Ndamsa,

and Achille Jean Baptiste Nsoe Nkouli,
“Heavily Indebted Poor Countries
Initiative (HIPC), Economic Stability,
and Economic Growth in Africa,”
Volume 43, Number 1

Copyright 2018
 HEAVILY INDEBTED POOR COUNTRIES
INITIATIVE (HIPC), ECONOMIC STABILITY, AND
ECONOMIC GROWTH IN AFRICA

Henri Atangana Ondoa, Dickson Thomas Ndamsa,

and Achille Jean Baptiste Nsoe Nkouli*

D uring the 1990s, Africa recorded poor macroeconomic performance with

particularly negative growth rates in some countries, relatively high inflation
rates, and budget and trade deficits. This situation was the consequence of several

*Henri Atangana Ondoa is an Associate Professor in the Faculty of Economics and Management
of the University of Yaounde II (Cameroon) where he obtained a Ph.D. in economy in collaboration
with the African Economic Research Consortium (AERC) and is a researcher at the University’s
Centre of Studies and Research in Economics and Management (CEREG). The author has taken part
in numerous impact assessments (UNDP, International Development Research Centre, ECA,
AFROBOTER, and Rio Tinto Alcan) in addition to holding internships with the IMF, UNCTAD,
and AERC. He worked with SECOR Canada on the estimation of socio-economic effects related to
their activities in Cameroon and on the UNDP’s capacity assessment of Cameroonian institutions.
His articles have been published in International Labor Review, Labor History, Economics Bulletin,
and African Development Review, as a sampling.
Dickson Thomas Ndamsa, a Senior Lecturer at the University of Bamenda, earned a B.Sc. in
economics, a Ma^ıtrise in economics with emphasis on quantitative methods, a DEA in mathematical
economics and econometrics, and a Ph.D. in economics from the University of Yaoundé II. The
author has participated in numerous international forums on economic development. He has
benefited from the AERC training on Service Delivery Indicators in addition to publishing
articles in journals such as Revue d’Economie, African Integration and Development Review,
Journal of Entrepreneurship: Research & Practice, Asian Journal of Economic Modelling, and
International Academic Journal of Economics and Finance. He is a consultant at the CEREG and
serves as a Consultant/Expert at CPAC on issues of sustainable development.
Achille Jean Baptiste Nsoe Nkouli, a Lecturer in the Faculty of Economics and Management of
the University of Yaounde II, earned a master’s degree in economy, mathematics, and econometrics
(continued).

The Journal of Energy and Development, Vol. 43, Nos. 1 and 2

Copyright Ó 2018 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.
99
100 THE JOURNAL OF ENERGY AND DEVELOPMENT

factors such as falling commodity prices, ineffective economic policies, and debt
crises. To address these problems, many African countries have undertaken
structural reforms with the International Monetary Fund (IMF) and the World
Bank. For instance, since 1996 several initiatives have been undertaken by the
international community to reduce the debt of poor countries. The Heavily In-
debted Poor Countries Initiative (HIPC) was launched in 1996 by the IMF and
World Bank with the aim of ensuring that no country categorized as a “Least
Developed Country” (LDC) faces a debt burden it cannot manage. There is also
the Multilateral Debt Relief Initiative (MDRI) launched in 2005. The MDRI al-
lows for 100 percent relief on eligible debts by three multilateral institutions the
IMF, the World Bank, and the African Development Fund (AfDF) for countries
completing the HIPC Initiative process.1
In 1999, this initiative was coupled with other measures in order to provide
faster, deeper, and broader debt relief and strengthened the links between debt
relief, poverty reduction, and social policies. To date, debt reduction packages
under the HIPC Initiative have been approved for 36 countries, 30 of them in
Africa, providing U.S. $75 billion in debt-service relief over time. Three addi-
tional African countries (Eritrea, Somalia, and Sudan) are eligible for HIPC Ini-
tiative assistance, which are Pre-Decision-Point Countries, and Chad is an interim
country, that is, between Decision and Completion Point.2 To benefit from these
debt reductions, the country must, among other conditions, develop a Poverty
Reduction Strategy Paper (PRSP) through a broad-based participatory process in
the country.
The consequences of these reforms on African economies are well documented
but have never been estimated. According to the African Development Bank,
Africa achieved positive annual real gross domestic product (GDP) growth rates
owing to favorable external conditions and to improvements in domestic eco-
nomic policies in particular, a recovery in the world economy, rising commodity
prices, improved macro-economic stability, and country-specific developments.3
The International Monetary Fund4 attested that the policies toward free trade are
among the more important factors promoting economic growth and convergence
in developing countries, while the Organization for Economic Co-operation and
Development (OECD)5 reports that more open and outward-oriented economies

and a Ph.D. in industrial economics from that institution; he is also a researcher at CEREG.
Previously, the author was responsible for economic and statistical studies at Cameroon’s power
utility (AES-SONEL) and worked as a consultant on several energy projects at the national level
(Electricity Sector Development Plan in Cameroon) as well as at the sub-regional level (the Central
African Power Pool) and continent-wide. The author was Cameroon’s focal point during the
consolidation of the Association of Power Utilities of Africa database. He holds professional training
certificates from SNC LAVALIN/Hydro QUEBEC in the field of electricity planning and pricing.
His articles have been published in The Journal of Energy and Development.
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 101

consistently outperform those with restrictive trade and foreign investment re-
gimes. In a similar vein, the World Bank6 argues that international trade opens up
unprecedented opportunity for growth and development. However, market re-
forms undertaken since the debt crisis of the early 1980s failed to correct the
failures of the manufacturing sub-sector in most LDCs. Trade liberalization has
even exposed local industries of LDCs to competition for which they were un-
prepared. As a result, large parts of manufacturing have disappeared over the last
20 years in Africa. This process of de-industrialization was more pronounced in
countries with a low level of development. Instead of reducing their structural
vulnerabilities, trade liberalization has increased it. In short, this was premature
liberalization in LDCs, given their level of development.7
The objective of this paper is to investigate the impact of Heavily Indebted
Poor Countries Initiative (HIPC) on economic growth and economic stability in 40
African countries. This paper also identifies the determinants of economic growth
and economic stability. In this perspective, this article is organized as follows: we
first present the literature review, the second section develops the methodology,
and the third section provides the empirical results.

Literature Review

There is a strong debate about the consequences of IMF and World Bank re-
forms on economies. Indeed, with an empirical growth model that controls for
other determinants of growth, J. Butkiewicz and H. Yanikkaya showed that World
Bank lending stimulates growth in some cases, primarily by increasing public
investment.8 Fund lending is either neutral or detrimental to growth. The channel
for this effect is a negative impact of Fund lending on public as well as private
investment. L. Dicks-Mireaux et al. found significant beneficial effects of IMF
support on output growth and the debt/service ratio but no effects on inflation.9
However, the World Bank/IMF model is likely to deindustrialize the existing
manufacturing base in Africa without encouraging any significant replacement.10
A. Dreher distinguished several channels through which the IMF reforms could
influence economic growth, among them being advice to policy makers, money
disbursed under its programs, and its conditionality.11 The same author used
a panel for the period 1970–2000 to show that IMF programs reduce growth rates
when their endogeneity is accounted for. In addition, compliance with condi-
tionality mitigates this negative effect, while the overall impact, however, remains
negative. According to M. Gradstein, rules always lead to faster capital accu-
mulation and growth, but political support for them is only likely to occur in
a stable economy.12 According to W. Easterly, adjustment programs of the
IMF and World Bank had a positive effect on policies or growth for the period
1989-1999.13
102 THE JOURNAL OF ENERGY AND DEVELOPMENT

The failure of IMF and World Bank programs is sometimes caused by poor
governance of these two institutions and by their conditionality. Indeed, good
governance could be improved within the IMF and the World Bank. Specifically,
these institutions should change their constitutional rules, their balancing of
stakeholders’ rights, their decision-making rules, and practices. If these conditions
are met, their staffing and expertise will need to be considered.14 According to
J. Svensson, competition among recipients allows the donor to make inferences
about common shocks, which otherwise conceal the recipient’s choice of action.15
This enables the donor to give aid more efficiently. However, C. Kilby showed
evidence that World Bank structural adjustment loan disbursements are less de-
pendent on macroeconomic performance in countries aligned with the United
States.16 The probability of success of adjustment programs is positively related to
the level of individual uncertainty and the speed of learning about the benefits of
stabilization, and negatively related to the cost of financing the budget deficit
during the first stage and, under certain conditions, to the degree of political un-
certainty.17 In ethnically divided societies, economic reform may be completed not
despite of ethnic conflict but because of it.18
Stabilization causes economic growth for a number of reasons. For instance,
increased price stability improves the utilization of capital and thus increases the
full employment level of output in the long run. Furthermore, the static output gain
from stabilization is captured in a simple formula in which the gain is approxi-
mately proportional to the square of the original inflation distortion.19 J. Woo
established a negative relation between macroeconomic volatility and growth in
a large sample of countries over the period of 1960–2000.20 International capital
mobility affects growth in each economy directly through the size of domestic
investment and indirectly through the aggregate saving rate. Under certain con-
ditions, the indirect effect may dominate the direct effect so that international
capital mobility raises output in the poor country and globally, although net capital
flows are in the direction of the rich country.21
C. Kirkpatrick and Z. Onis studied the impact of IMF stabilization programs on
inflation performance in LDCs during the 1970s.22 They showed that the success
of a program in affecting a change in the inflationary process is influenced by the
structural characteristics of the economy and, in particular, by the stage of in-
dustrialization attained. In certain countries, IMF programs increase inflation and
reduce the labor share of income. Negotiation of conditions for assistance imposes
heavy costs upon recipients and gross macroeconomic distortions are overcome.
Indeed, IMF programs support output growth and the debt/service ratio but have
no effects on inflation.23
According to A. Galindo et al., liberalization increases the efficiency with
which investment funds are allocated.24 Freeing of trade by India leads to greater
domestic price stability even though world prices are more volatile. Indeed, under
liberalized trade, subsidies are more effective in stabilizing domestic prices
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 103

compared to buffer stocks.25 In addition, more integration mainly improves the

search for investment opportunities and formal institutions are needed to keep
entrepreneurs in check. In addition, when economies are integrated, growth is
explained by a feedback effect from investment to the formation of long-distance
links and the diffusion of knowledge.26 Based on the estimation of a probit model,
L. Ibarra showed that trade liberalization reduced capital accumulation during the
first years of the reform in Mexico.27
The impact of trade reform on investment is negative because participation
in IMF/World Bank reduces economic growth, lowers public investment, and
domestic investment.28 P. Astorga found a negative conditional correlation
between trade openness and GDP per capita growth and a positive correlation
between openness and investment.29 He also showed that macroeconomic in-
stability has been a drag on long-term growth in the region. This vulnerability
increased with structural adjustment programs in 1990. Indeed, the combi-
nation of trade liberalization with an overvalued exchange rate and financial
liberalization had, in particular, negative effects on manufacturing production
and investment.30 P. Hull and M. Imai affirmed that in the short term, eco-
nomic shocks affect the trajectory of the political and economic performance
in ethnically divided states.31 In the short run, trade liberalization has a bene-
ficial impact on the rich and fast-growing middle-income states and a marginal
or negative impact on the poor states.32 However, A. Popov studied the effect
of liberalization on economic growth in 93 countries during the 1973–2009
period and found that opening the economy to foreign portfolio investment
results in a substantially higher negative skewness of output growth.33
B. Aghion and P. Hinestrosa demonstrated that repayment of the external debt
is shown to involve a delicate trade-off between growth and inflation: on the
one hand, the government increases its ability to keep domestic interest rates
relatively low thereby promoting investment and growth; on the other hand,
the government worsens the budget-deficit problem, thereby introducing ad-
ditional inflationary pressures.34
In addition, the risk of program failure from uncertainty and underfunding
typically exceeds that from the absence of further policy reforms, the effects of
which are unproven.35 A. Dreher and S. Walter investigated whether nations with
previous IMF intervention are more likely to experience currency crises and the
impact of IMF programs on a country’s decision to adjust the exchange rate.36
They found that IMF involvement reduces the probability of a crisis. Indeed, the
participation in IMF/World Bank programs increases budget surpluses and real
depreciation of the exchange rate.37 However, IMF programs significantly in-
crease the probability that the governments devalue the exchange rate. But the
above variables are not impacted by the amount of loans and compliance with
conditionality. It would be unwise for the IMF to cease to abandon conditionality
altogether. Indeed, IMF programs need to be redesigned and refocused.38
104 THE JOURNAL OF ENERGY AND DEVELOPMENT

Geographic and institutional factors are also major determinants of IMF and
World Bank programs’ success. For instance, the geographic predisposition to
trade is an important determinant of economic volatility. According to A. Malik
and J. Temple, remote countries are more likely to have undiversified exports and
to experience greater volatility in output growth.39 The international development
community has advocated various development paradigms, but countries fol-
lowing these paradigms have often performed poorly because institutions are weak
in developing nations. For instance, production is high when productive capacity
is high, and when the policy is appropriate in the country-specific circumstances
and implemented honestly. Aid inflows are high when the policy is close to in-
ternational development community programs. Consequently, countries with low
productive capacity and high corruption resulting from weak political institutions
follow the paradigm more closely. For these reasons, development paradigms have
a tendency to fail because they are primarily followed by countries that would fail
anyway.40 According to R. Larsen and C. Mamosso, foreign aid to Niger has ig-
nored grievances of grave environmental impacts and rampant institutional fail-
ures while a crisis discourse on desertification and food insecurity diverts attention
from geopolitical interests in mineral wealth.41 Furthermore, aid delivery remains
insufficient to address structural deficiencies such as lack of investment, poor
human capital, and lack of democracy.
Political factors are other crucial determinants. In this regard, the study of
Ari A. Aisen and F. Veiga showed that greater political instability leads to higher
seigniorage, especially in less democratic and socially polarized countries, with
high inflation, low access to domestic and external debt financing, and with higher
turnover in their central banks.42 During periods of elections, IMF programs al-
ways break down in the recipient countries, particularly in less democratic
countries. Economic variables also matter since IMF program interruptions are
significantly more likely in states with high government consumption, high levels
of short-term debt, and low GDP per capita at program initiation.43 The prolonged
use made of IMF resources by a number of member countries is explained by the
fact that the IMF is a source of temporary balance of payments support.44

Methodology

In this section, we present the data and the empirical model used to investigate
the impact of the Heavily Indebted Poor Countries Initiative on economic per-
formance in Africa.
The Data: Data employed in this study are from the World Bank, that is, the
World Development Indicators (WDI) and the Worldwide Governance Indicators
(WGI). The period of study is 1990-2012. We choose this period because the
Heavily Indebted Poor Countries Initiative was launched in 1996 and some
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 105

African countries had begun to benefit from the effects of this initiative in 2000.
The geographical area of the study covers 40 African countries, with the exception
of South Sudan and 12 African countries that joined the HIPC Initiative and
reached the decision point after the year 2000. These countries are: Burundi, the
Central African Republic (CAR), Congo Democratic Republic, Congo Republic,
Ethiopia, Ghana, Liberia, Sierra Leone, Chad, Comoros, Cote d’Ivoire, and Togo.
We exclude these countries because the baseline in this analysis is the year 2000.
The treated group of 18 countries joined the HIPC Initiative and had reached the
decision point in the year 2000 (see table 1). Another 22 African countries have
not joined the HIPC Initiative; this last group is a control group.
Table 2 presents some descriptive statistics. We can observe that for the period
1990-2012, the African economies were not stabilized. Indeed, during this period,
the average rate of external balance of goods and services as the percentage of
GDP is estimated at -12.79 percent. In some countries, this statistic exceeds
344 percent. We also observe that the average level of inflation is very high

Table 1
LIST OF AFRICAN COUNTRIES THAT HAVE REACHED THE DECISION POINT ON THE
a
HIPC INITIATIVE

Decision Completion Decision Completion

Countries Point Point Countries Point Point

Benin Jul-2000 Mar-2003 Mozambique Apr-2000 Sep-2001

Burkina Faso Jul-2000 Apr-2002 Niger Dec-2000 Apr-2004
Burundi Aug-2005 Jan-2009 Rwanda Dec-2000 Apr-2005
Cameroon Oct-2000 Apr-2006 Sao Tome & Pri. Dec-2000 Mar-2007
CAR Sep-2007 Jun-2009 Senegal Jun-2000 Apr-2004
Congo Dem. R. Jul-2003 Jul-2010 Sierra Leone Mar-2002 Dec-2006
Congo Rep. Mar-2006 Jan-2010 Tanzania Apr-2000 Nov-2001
Ethiopia Nov-2001 Apr-2010 Uganda Feb-2000 May-2000
Gambia Dec-2000 Dec-2007 Zambia Dec-2000 Apr-2005
Ghana Feb-2002 Jul-2004 Chad May-2001 Floating
Liberia Mar-2008 Jun-2004 Comoros Jun-2010 Floating
Madagascar Dec-2000 Oct-2004 Cote d’Ivoire Mar-2009 Floating
Malawi Dec-2000 Aug-2006 Guinea Dec-2000 Floating
Mali Sep-2000 Mar-2003 Guinea Bissau Dec-2000 Floating
Mauritania Feb-2000 Jun-2002 Togo Nov-2008 Floating

a
HIPC = Heavily Indebted Poor Countries Initiative; CAR = Central African Republic; Congo
Dem. R.= Democratic Republic of Congo; Congo Rep. = Republic of Congo (also called Congo-
Brazzaville); and Sao Tome & Pri. = Sao Tome and Principe.
Source: International Monetary Fund (IMF), Debt Relief under the Heavily Indebted Poor
Countries (HIPC) Initiative (Washington, D.C.: IMF, 2014).
106 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 2
DESCRIPTIVE STATISTICS, 1990–2012

Std.
Variable Obs. Mean Dev. Min. Max.

Gross capital formation (% of gross

domestic product–GDP) 915 23.463 18.086 -2.424 227.479
External balance on goods and
services (% of GDP) 915 -12.793 27.560 -344.7 45.839
External debt stocks (% of exports
of goods, services and primary income) 802 404.177 594.710 4.584 4,223.91
GDP growth (annual %) 916 4.630 8.753 -62.07 149.973
Cash surplus/deficit (% of GDP) 775 -1.234 9.307 -19.7 129.504
Foreign direct investment, net
inflows (% of GDP) 912 4.015 8.682 -8.589 161.824
General government final cons
expenditure (% of GDP) 902 15.338 7.335 2.047 69.543
School enrollment, primary (% gross) 811 91.968 27.197 19.867 164.858
Total natural resources rents (% of GDP) 918 13.431 16.128 0 100.367
Telephone lines (per 100 people) 914 3.438 5.590 0 31.504
Urban population (% of total) 914 37.708 16.724 5.416 86.458
Labor force, total 919 6,421,677 833,314 34,006 5.26e+07
Inflation, consumer prices
(annual %, without Zimbabwe) 882 10.02 12.93 -33.20 98.224
Inflation, consumer prices
(annual %) 900 52.647 832.362 -33.2 24,411.03
GDP per capita
(constant 2005 U.S.$) 918 1,737.33 2,500.23 111.78 13,889.95
Political stability 748 -0.458 0.935 -3.323 1.192
Control of corruption 746 -0.518 0.610 -1.924 1.250
Regulatory quality 748 -0.614 0.692 -2.668 1.057

Source: Compiled by authors.

(52.6 percent) because of Zimbabwe (without Zimbabwe the level of inflation falls
to 10 percent). The external debt stocks (in percentage of exports of goods, ser-
vices, and primary income) is equal to 404.17 and the public expenditures exceed
total public income since the average level of cash surplus/deficit in percentage of
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 107

GDP is negative and equal to -1.23 percent. However, some macroeconomic in-
dicators such as GDP, gross capital formation (in percentage of GDP), foreign
direct investment, and net inflows (in percentage of GDP) increased in Africa
during the period 1990-2012. For instance, the growth rate of GDP is 4.63 percent
and African states devoted on average 23.46 percent of their GDP to gross capital
formation. Concerning the control variables, it can be observed from table 2 that
the average gross enrollment rate in primary school stands at 91.96 percent.
However, in certain countries like Mali or Eritrea, the gross enrollment ratio in
primary school sometimes does not exceed 20 percent. The average GDP per
capita (in constant 2005 U.S. dollars) is $1,737 dollars. But in some African
countries like the Democratic Republic of Congo, the GDP per capita does not
exceed $150. The quality of governance is poor in Africa owing to the average
values of the following governance indicators: control of corruption, regulatory
quality, and political stability, which are negative.
Empirical Model: To investigate the effect of Heavily Indebted Poor Coun-
tries Initiative on economic stability and on economic growth, one can use the
computable general equilibrium (CGE) model. Indeed, this model is generally
used to simulate the economy-wide impact of a range of hypothetical policy le-
vers, including: increased government spending, the elimination of tariff barriers,
and an improvement in total factor productivity.45 However, we must build the
social accounting matrix to evaluate the effect of a policy with the CGE. Yet the
social accounting matrices have not been developed in all African countries or are
not regularly updated. For this reason, we will use the difference-in-difference
(DID) approach to estimate the effect of the HIPC Initiative on economic stability
and on economic growth.
The difference-in-difference treatment effects have been widely used when the
evaluation of a given intervention entails the collection of panel data or repeated
cross sections. Because DID integrates the advances of the fixed effects estimators
with the causal inference analysis when unobserved events or characteristics
confound the interpretations. Furthermore, DID estimations offer an alternative
reaching the problem of unobserved characteristics by combining it with observed
or complementary information. Additionally, the DID is a flexible form of causal
inference because it can be combined with some other procedures, such as the
Kernel.46
It should be recalled that once a country reaches the decision point, it may
immediately begin receiving interim relief on its debt service falling due. The
reader should also keep in mind that, to reach the completion point, the country
must: (1) establish a further track record of good performance under programs
supported by loans from the IMF and the World Bank, (2) implement satisfactorily
key reforms agreed at the decision point, and (3) adopt and implement its Poverty
Reduction Strategy Paper (PRSP) for at least one year. If a country has met these
108 THE JOURNAL OF ENERGY AND DEVELOPMENT

criteria, it can reach its completion point, which allows it to receive the full debt
relief committed at the decision point.47 The purpose of the HIPC Initiative is to
address the development needs of low-income countries and make sure that debt
sustainability is maintained over time. For debt reduction to have a tangible impact
on poverty, the additional money needs to be spent on programs that benefit the
poor. Among the conditions, eligible countries were supposed to increase mark-
edly their expenditures on health, education, and other social services such as
access to improved water. On average, such spending is about five times the
amount of debt-service payments.48 From this perspective, equation (1) specifies
the model to be estimated.


Yi;t ¼ a þ bTreati;t þ cPosti;t þ d Treati;t Posti;t þ ei;t ð1Þ

In equation (1), Treati,t is a binary indicator (“turns on” from 0 to 1) for being in
the treatment group; Posti,t is a binary indicator for the period after treatment, here,
the decision point; Treati,tPosti,t is the interaction factor; i is the country; t is the
year; and Y is the outcome variable. We consider two types of indicators: those of
economic stability and those of economic growth.
The indicators of economic stability are: external balance on goods and ser-
vices (as a percentage of GDP); cash surplus/deficit of public finance (as a per-
centage of GDP); and inflation, consumer prices (annual percentage).
The indicators of economic growth are: GDP per capita growth; gross capital
formation or gross.
In equation (1) parameter a is the mean outcome for the control group on the
baseline; b is the single difference between treated and control groups on the
baseline; d is the DID or impact; a + c is the mean outcome for the control group in
the follow-up; a + b is the mean outcome for the treated group on the baseline, and
a + b + c + d is the mean outcome for the treated group in the follow-up. The study
covers the period 1990-2012.
Equation (1) allows us to estimate the effects of the HIPC Initiative on in-
dicators of economic performance and not to identify other determinants of eco-
nomic performance. For this reason, we add the control variables in equation (1) as
specified in equation (2).


Yi;t ¼ a þ bTreati;t þ cPosti;t þ d Treati;t Posti;t þ Xi;t Bk
X
2012
þ ah yearh þ ei;t ð2Þ
h¼1990

In equation (2), a is a parameter to be estimated; h is the year; k is a number of

control variables; and X specifies the pre-treatment covariates of the model, that is,
controls or observable characteristics. The variables used and their definitions are
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 109

presented in table 3. We use dummies for years as time-variant control variables,

that is, we use a standard fixed-effects model with years to control an eventual
serial correlation. However, there is a problem of double causality between each
dependent variable and some exogenous variables used in equation (2). For this
reason, a two-stage least squares estimation that accounts for the endogeneity of
certain independent variables will be used. The estimations take account of the
likely endogeneity of these explanatory variables by using lagged values as
instruments. These lagged variables prove to be good instruments because the
error term in equation (2) turns out to display little serial correlation. The stat-
istician Hansen shows us that these instruments are not correlated with the error
term and, thus, that the instruments are valid. The Kleibergen-Paap rk LM
Statistic rejects the null hypothesis that the first stage is under-identified, so our
instruments are correct.

Empirical Results

In this section, we present the estimated impact of Heavily Indebted Poor

Countries Initiative on economic stability and on economic growth in Africa.
We also identify other sources of economic stability and economic growth in
Africa.
The Estimated Impact of Heavily Indebted Poor Countries Initiative on
Economic Stability and Economic Growth: The estimated impact of Heavily
Indebted Poor Countries Initiative on economic stability and economic growth is
presented in table 4. The results show that the impact of the HIPC Initiative on
economic stability is negative but it increases economic growth in Africa.
Economic Stability: The HIPC Initiative has no significant effect on inflation
and on public deficit but deteriorates external balance of goods and services. For
instance, column 2 of table 4 presents the initial difference of the average level of
inflation between the control group and the treated group. We observe that, on the
baseline, the initial level of inflation is 12.39 percent for the control group. The
same statistic is estimated at 11.09 percent for the treated group. The initial dif-
ference between the treated group and the control group is -1.35 percent. During
the second period (after the decision point), inflation decreased on average from
12.39 percent to 11.1 percent for the control group. For the treated group, inflation
decreased on average from 11.09 percent to 8.45 percent (table 4 and figure 1).
The difference-in-difference, that is, the effect of the HIPC Initiative on inflation
is -1.3 percent, though not significant. The same observation is registered for the
budget deficit (figure 2). Concerning the trade balance, table 4 shows that the trade
deficit as a percentage of GDP was estimated at -20.19 percent for the control
group on the baseline compared to -10.08 percent for the treated group. In other
110 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 3
a
VARIABLES USED

Variable Definition Source

Gross capital formation (% of GDP)

Gross capital formation (formerly gross domestic investment) consists of
outlays on additions to the fixed assets of the economy plus net changes
in the level of inventories. Fixed assets include land improvements (fences,
ditches, drains, and so on); plant, machinery, and equipment purchases;
and the construction of roads, railways, and the like, including schools,
offices, hospitals, private residential dwellings, and commercial and
industrial buildings. Inventories are stocks of goods held by firms
to meet temporary or unexpected fluctuations in production or sales
and “work in progress.” According to the UN’s 1993 SNA (System
of National Accounts), net acquisitions of valuables are also
considered capital formation. WDI
External balance on goods and services (% of GDP)
External balance on goods and services (formerly resource balance)
equals exports of goods and services minus imports of goods and
services (previously non-factor services). WDI
Urban population (% of total)
Urban population refers to people living in urban areas as defined
by national statistical offices. It is calculated using World Bank
population estimates and urban ratios from the United Nations
World Urbanization Prospects. WDI
Labor force, total
Total labor force comprises people ages 15 and older who meet
the International Labor Organization’s definition of the
economically active population: all people who supply labor
for the production of goods and services during a specified period.
It includes both the employed and the unemployed. While national
practices vary in the treatment of such groups as the armed forces and
seasonal or part-time workers, in general the labor force includes the
armed forces, the unemployed, and first-time job-seekers, but excludes
homemakers and other unpaid caregivers and workers in the informal sector. WDI
Cash surplus/deficit (% of GDP)
Cash surplus or deficit is revenue (including grants) minus expense,
minus net acquisition of nonfinancial assets. In the IMF’s 1986 GFS
(Government Finance Statistics) Manual non-financial assets were
included under revenue and expenditure in gross terms. This cash surplus
or deficit is closest to the earlier overall budget balance (still missing is
lending minus repayments, which are now a financing item under
net acquisition of financial assets). WDI

(continued)
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 111

Table 3 (continued)
a
VARIABLES USED

Variable Definition Source

General government final consumption expenditure (% of GDP)

General government final consumption expenditure (formerly general
government consumption) includes all government current expenditures for
purchases of goods and services (including compensation of employees).
It also includes most expenditures on national defense and security but
excludes government military expenditures that are part of government
capital formation. WDI
Foreign direct investment, net inflows (% of GDP)
Foreign direct investment are the net inflows of investment
to acquire a lasting management interest (10 percent or more
of voting stock) in an enterprise operating in an economy other
than that of the investor. It is the sum of equity capital, reinvestment
of earnings, other long-term capital, and short-term capital as shown
in the balance of payments. This series shows net inflows (new
investment inflows less disinvestment) in the reporting economy
from foreign investors, and is divided by GDP. WDI
Inflation, consumer prices (annual %)
Inflation as measured by the consumer price index reflects the
annual percentage change in the cost to the average consumer
of acquiring a basket of goods and services that may be fixed
or changed at specified intervals, such as yearly. The Laspeyres
formula is generally used. WDI
External debt stocks (% of exports of goods, services, and primary income)
Total external debt stocks to exports of goods, services, and income. WDI
GDP growth per capita (annual %)
Annual percentage growth rate of GDP at market prices based on
constant local currency. Aggregates are based on constant 2005 U.S.
dollars. GDP is the sum of gross value added by all resident producers
in the economy plus any product taxes and minus any subsidies not
included in the value of the products. It is calculated without making
deductions for depreciation of fabricated assets or for depletion and
degradation of natural resources. WDI
GDP per capita (constant 2005 U.S. dollars)
GDP per capita is gross domestic product divided by midyear population.
GDP is the sum of gross value added by all resident producers in the
economy plus any product taxes and minus any subsidies not included
in the value of the products. It is calculated without making deductions
for depreciation of fabricated assets or for depletion and degradation
of natural resources. Data are in constant 2005 U.S. dollars. WDI

(continued)
112 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 3 (continued)
a
VARIABLES USED

Variable Definition Source

Total natural resources rents (% of GDP)

Total natural resources rents are the sum of oil rents, natural
gas rents, coal rents (hard and soft), mineral rents, and forest rents. WDI
School enrollment, primary (% gross)
Gross enrollment ratio is the ratio of total enrollment, regardless
of age, to the population of the age group that officially corresponds
to the level of education shown. Primary education provides children
with basic reading, writing, and mathematics skills along with an
elementary understanding of such subjects as history, geography,
natural science, social science, art, and music. WDI
Telephone lines (per 100 people)
Telephone lines are fixed telephone lines that connect a subscriber’s
terminal equipment to the public switched telephone network and
that have a port on a telephone exchange. Integrated services
digital network channels and fixed wireless subscribers are included. WDI
Regulatory quality
Reflects perceptions of the ability of the government to formulate
and implement sound policies and regulations that permit and
promote private-sector development. WGI
Political stability and absence of violence/terrorism
Reflects perceptions of the likelihood that the government will be
destabilized or overthrown by unconstitutional or violent means,
including politically-motivated violence and terrorism. Estimate
of political stability and absence of violence/ terrorism ranges from
approximately -2.5 (weak) to 2.5 (strong) governance performance. WGI
Control of corruption
Reflects perceptions of the extent to which public power is exercised
for private gain, including both petty and grand forms of corruption,
as well as “capture” of the state by elites and private interests. Estimate
of control of corruption ranges from approximately -2.5 (weak) to 2.5
(strong) governance performance. WGI

a
GDP = gross domestic product; WDI = World Bank Development Indicators; WGI =
Worldwide Governance Indicators.

words, the initial difference in terms of trade deficit between the control group and
the treated group stood at 10.11 percent. After the decision point, the average level
of trade balance increased from -20.19 percent to -15.28 percent for the control
group. But for the treated group and during the same period, the trade balance of
goods and services decreased from -10.08 percent to -13.258 percent and the
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 113

Table 4
DETERMINANTS AND IMPACTS OF THE HIPC INITIATIVE ON ECONOMIC
a
PERFORMANCE IN AFRICA

External
Inflation/ Gross balance
consumer capital on goods
prices formation and
Variables annual % of GDP services GDP growth

External debt stocks of 0.0145*** -0.009*** -0.001

exports goods & services (0.00281) (0.00161) (0.00144)
General government final 2.081*** 0.536*** -0.442**
consumption (0.235) (0.076) (0.174)
Telephone lines per 100 0.200 0.395*
people (0.251) (0.234)
0.317*** 1.886***
GDP growth (0.035) (0.429)
-1.353* -3.785** 10.11*** -0.013***
Treated (0.784) (1.825) (1.460) (0.011)
-1.119*** -2.748** 5.362*** 0.006**
Period (0.047) (2.894) (0.041) (0.012)
-1.3 4.883*** -8.244*** 0.030**
Treated*period=DID (1.480) (1.670) (1.302) (0.012)
0.091* 0.021 0.772**
Primary school enrollment (0.053) (0.021) (0.065)
Total natural resources 0.453*** 1.499*** 0.459*** 0.0054**
rents (% of GDP) (0.0909) (0.0591) (0.0598) (0.0027)
0.143*** 0.522*** 0.066**
Urban population (0.039) (0.115) (0.008)
5.472*** -3.944** 0.033**
Regulatory quality (1.383) (1.958) (0.014)
Gross capital formation 1.155*** 0.066***
(in % of GDP) (0.122) (0.026)
-3.745***
Franc zone (0.662)
1.018 0.68**
Labor force (1.112) (0.312)

(continued)
114 THE JOURNAL OF ENERGY AND DEVELOPMENT

Table 4 (continued)
DETERMINANTS AND IMPACTS OF THE HIPC INITIATIVE ON ECONOMIC
a
PERFORMANCE IN AFRICA

External
Inflation/ Gross balance
consumer capital on goods
prices formation and
Variables annual % of GDP services GDP growth

1.908**
Political stability (0.931)
6.418*** 0.016*
Control of corruption (1.610) (0.009)
12.39*** 25.41*** -20.19*** 0.02***
Constant (2.06) (0.835) (7.051) (0.011)
Observations 563 444 527 257
Number of countries 40 40 40 40
2
Centered R 0.9546 0.9235 0.9456 0.931
316.8*** 302.7*** 311.0*** 298.5***
F-statistic (0.000) (0.000) (0.000) (0.000)
Kleibergen-paap rk LM 33.01*** 27.02*** 25.1*** 28.1***
statistic (0.000) (0.000) (0.000) 90.000)
0.322 0.616 0.56 0.78
Hansen J statistic (0.724) (0.365) (0.334) (0.254)

a
*** p<0.01; ** p<0.05; * p<0.1; standard errors in parentheses; HIPC = heavily indebted poor
countries; GDP = gross domestic product.
Source: Based upon authors’ empirical results.

difference in terms of trade deficit between the two group decreases from 10.11
percent to -2.13 percent, respectively. This means that the HIPC Initiative in-
creased the trade deficit of about -12.24 percent on the treated group (see also
figure 3). This result is explained by trade liberalization advocated by the IMF and
World Bank.
Economic Growth: The effect of the HIPC Initiative on economic growth is
positive. Indeed, in table 4 we observe that, on the baseline, the average level of
GDP per capita growth is 1.91 percent for the control group. The same statistic is
estimated at 0.6 percent for the treated group. The initial difference between the
treated and control group is -1.31 percent. During the second period the growth
rate of GDP per capita increased on average from 1.91 percent to 2.49 percent for
the control group. For the treated group, GDP per capita increased from 0.6 percent
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 115

to 5.174 percent (table 4 and figure 4). Thus, at the end of the second period, the
difference between the two groups rose from -1.31 percent to 1.61 percent. In other
words, the two groups have nearly the same growth rate at the end of the second
period. The difference-in-difference, that is, the effect of the HIPC Initiative
on GDP per-capita growth is 2.92 percent, and this result is significant at the
1-percent level. The effect of the HIPC on gross capital formation is also positive
(figure 5). Indeed, the initial levels of gross capital formation (in percentage of
GDP) are 25.414 percent and 21.629 percent for the treated group; the initial
difference between the two groups is -3.785. During the second period, gross
capital formation increased in the treated group from 21.629 percent to 23.74
percent. But for the control group, gross capital formation decreased from
25.414 percent to 22.66 percent. For the second period the difference between
the two groups is 1.098 percent. The difference-in-difference, that is, the effect
of the HIPC on gross capital formation and foreign direct investment (FDI) is
4.88 percent (figure 6).
Growth in Africa: In this sub-section, we present the determinants of eco-
nomic stability and the determinants of economic growth in Africa.
The Determinants of Economic Stability in Africa: The determinants of eco-
nomic stability are presented in table 4. These results show that inflation is pos-
itively affected by external debt, general government final consumption, gross
enrollment rate in primary school, gross capital formation, and total natural re-
sources rents. In addition, inflation is relatively low in the franc Zone because
these countries follow certain principles of monetary policy of the European
Union. This result suggests that the adoption of inflation targeting is an ideal
monetary regime for developing economies and, in addition to reducing inflation
volatility, can drive inflation down to internationally acceptable levels.49 Several
other studies support our results. Indeed, the main driver of short-run inflation in
certain African countries such as Ethiopia and Uganda is a surge in money supply,
accounting for 40 percent and one-third, respectively. In Kenya and Tanzania, oil
prices is another major determinant, accounting for 20 and 26 percent, re-
spectively, although money growth has also made a significant contribution to the
recent increases in inflation in these two countries.50 We must remember that the
countries that have reached the completion point have benefited from resources
that were used to finance social projects. For this reason, growth in money supply
causes inflation through investment and salaries. Indeed, during the 2000s many
African nations increased public investment to build schools and hospitals. Our
study also shows that inflation increases with general government final con-
sumption and public deficits because these public expenditures are always fi-
nanced by taxes. These results were also found by C. Hoon Lim and L. Papi.51
These authors showed that the public-sector deficit and depreciation contributed to
inflation in Turkey. Furthermore, economic growth is also a source of inflation
116 THE JOURNAL OF ENERGY AND DEVELOPMENT

Figure 1
EVOLUTION OF INFLATION IN AFRICA, 1990–2012

Source: Based upon authors’ empirical results.

Figure 2
EVOLUTION OF PUBLIC FINANCE DEFICIT IN AFRICA, 1990–2012

Source: Based upon authors’ empirical results.

 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 117

Figure 3
EVOLUTION OF EXTERNAL BALANCE OF GOODS AND SERVICES IN AFRICA,
1990–2012

Source: Based upon authors’ empirical results.

Figure 4
EVOLUTION OF GROWTH RATE OF GDP PER CAPITA IN AFRICA, 1990–2012

Source: Based upon authors’ empirical results.

118 THE JOURNAL OF ENERGY AND DEVELOPMENT

Figure 5
EVOLUTION OF GROSS CAPITAL FORMATION IN AFRICA, 1990–2012

Source: Based upon authors’ empirical results.

Figure 6
EVOLUTION OF FOREIGN DIRECT INVESTMENT (FDI) IN AFRICA, 1990–2012

Source: Based upon authors’ empirical results.

 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 119

because improved economic performance and sustained oil price increases exert
upward pressure on consumer prices.52
Concerning the determinants of the external balance of goods and services, it
is established that trade deficits increase with general government final con-
sumption and regulatory quality (because of trade liberalization) and decrease
with political stability, control of corruption, total natural resources rents, and
urban population. Indeed, in several African countries, raw materials are the
main sources of economic growth. Economic growth is particularly driven
by commodity exports in some developing nations.53 In Africa, for example,
Equatorial Guinea is an LDC that fortunately had the highest GDP per capita
(U.S. $17,500 in 2010) of the continent. During the last decade, the country
had experienced a higher rate of growth through the sale of oil. According to
M. Majumder, there is a relationship between the external balance of goods and
services and supply-side variables such as import cost, oil price hikes, the ex-
change rate, and production shocks.54 From this perspective, Africa’s external
position improved in 2006 owing to both higher export volumes and continuing
high terms of trade. This performance was due in part to the surge in the price of
metals such as copper owing to buoyant global demand driven mostly by Asian
countries, in particular China and India.55 Political stability and control of cor-
ruption are other major determinants because they improve exchange rate sta-
bility and increase international reserves. According to A. Arfan et al., political
stability is more important than economic freedom in stabilizing balance of
payments.56 In the context of political instability in Egypt, while domestic de-
mand was the driving engine of growth as it contributed 5.1 points, external
demand contracted this growth by 3.3 points with 2.8 points due to an increase
in imports. Despite the gradual depreciation of the Egyptian currency against
the U.S. dollar, inflation in Egypt has reached an average of 7.1 percent in
2011/2012, compared to 10.2 percent recorded in the year 2010/2011.57
The Determinants of Economic Growth in Africa: In table 4, it is shown that
the main determinants of economic growth and physical capital formation are
enrollment in primary school, physical capital, total natural resources rents,
urbanization, control of corruption, and political stability. Indeed, in Africa
economic growth and physical capital formation are sustained by both domestic
and external factors. The latter included external debt cancellation, increases in
the price of raw materials, and private capital inflows in the form of direct
investment and remittances. The main domestic factors are prudent policy
frameworks and improving business climates that helped promote macroeco-
nomic stability and resilience to external shocks.58 Furthermore, in our study,
natural resources abundance has a positive impact on economic growth. This is
not the case in the study of R. Chang et al.59 These authors showed that the ratio
of exports of primary goods to GDP was not significant in explaining growth by
120 THE JOURNAL OF ENERGY AND DEVELOPMENT

itself; but this variable, however, showed a significant and negative effect on
economic growth when combined with other trade structure variables. Our
results suggest that Africa’s economic growth is a fundamentally factor-input-
driven one, since economic growth increases with natural resources, physical
capital, and enrollment in primary schools. Like the study of D. Yet et al., we
observe that urbanization sustains economic growth in Africa.60 Specifically,
productivity gains, cost of production reductions, and value-added enhance-
ments associated with urbanization can cause growth. It has been shown that
many of the large cities of the developed countries facilitated lower-cost ship-
ment of products to far-flung markets or along trade routes.61 Economic growth
and gross capital formation also are explained by political and economic re-
forms, especially control of corruption, regulation, and political stability. This
result is in tandem with A. Berg et al.62 According to these authors, economic
growth is positively related to control of corruption, democratic institutions,
greater openness to FDI, avoidance of exchange-rate overvaluation, and mac-
roeconomic stability. The reforms also might affect private investment in re-
cipient countries not only through the funds they provide but also via the policy
conditions they include and the transfer of knowledge they imply. To test the
above hypothesis, M. Agostino investigated the impact of these channels on
private investment.63 He showed that backed commitments are associated with
lower investment ratios in the short run and none of the other potential channels
of influence seem to counterbalance this negative impact.

Conclusion

The objective of this paper was to investigate the impact of the Heavily In-
debted Poor Countries Initiative on economic growth and economic stability and
to assess other determinants of economic performance in Africa. In this regard,
this paper employed the DID approach and World Bank data for the period 1990-
2012. We began the study by reviewing related literature in order to identify
the potential determinants of economic performance. Thereafter, we presented
the empirical method used to estimate the impacts and to identify the determi-
nants of economic performance in Africa. The results indicated that the impact
of the initiative on economic performance is mitigated, since it causes economic
growth and economic instability. Concerning the other determinants of eco-
nomic performance, this study found that economic instability is caused by
political instability, external debt, general government final consumption, reg-
ulation (trade liberalization), gross enrollment in primary school, and total
natural resources rents. For economic growth, this study showed that educa-
tion, infrastructure, natural resources, urbanization, regulation, control of corrup-
tion, and political stability are crucial to economic growth in Africa. From this
 AFRICA: HIPC, ECONOMIC STABILITY, & GROWTH 121

perspective, governments of African nations should promote effective gover-

nance, train their population, and revise trade agreements to provide insurance for
economic growth and economic instability.

NOTES
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