WORLD TRADE
ORGANIZATIONWT/WGTDF/W/19
17 March 2003
(03-1549)
Working Group on Trade,
Debt and FinanceOriginal:  English
COMMUNICATION FROM THE ORGANISATION FOR ECONOMIC
CO-OPERATION AND DEVELOPMENT
The following communication, dated 14 March 2003, has been received from the OECD for
circulation to the Working Group.
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HIPC AND TRADE POLICY REFORM:  SOME EARLY OBSERVATIONS
TABLE OF CONTENTS
PAGE
EXECUTIVE SUMMARY………………………………………………….………………………..2
I. BACKGROUND……………………………………………………….……………………..2II. THE HIPC INITIATIVE………………………………………………….…………………3
III RECENT ECONOMIC, TRADE AND INVESTMENT
PERFORMANCE IN HIPC………………………………………………….………………4
REFERENCES…………………………………………………………………………….…………..9
ANNEX……………………………………………………………………………………………….10WT/WGTDF/W/19
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EXECUTIVE SUMMARY
In September 1996, the IMF and the World Bank launched the Heavily Indebted Poor
Countries (HIPC) Initiative to address the unsustainable external debt situation in many low-income
countries by offering debt relief to eligible countries that were pursuing sound economic policies tohelp reduce their external debt burden to sustainable levels. Following a major review, the Initiative
was significantly enhanced in 1999 to provide more rapid qualification and deeper and broader debt
relief to a larger number of countries conditional on a commitment to poverty reduction. By the end of
2002, 42 countries had been identified by the IMF and World Bank as being HIPC, of which six had
reached completion point, i.e. were receiving debt relief after having started to successfully
implement a Poverty Reduction Strategy. The total cost of assistance provided or committed to the 42
HIPC amounts to about $37.2 billion (in 2001 present value terms). An approximately equal share ofthis cost falls on bilateral and multilateral creditors.
The HIPC Initiative requires countries receiving debt relief to undertake a Poverty Reduction
Strategy programme involving elements of trade policy reform. This study reviews country
experiences with respect to the impact of reforms of trade and trade-related policies on economicperformance, export capacity and the ability to attract foreign direct investment. Trade policy reform
can be crucial for success in international market s. Opening domestic markets will change relative
prices, induce adjustments in consumption and production patterns to reflect comparative advantage
and, hence, lead to a more efficient use of resources. The resulting efficiency gains will tend to
translate into higher levels of economic growth, which in turn make investments from domestic andforeign sources more attractive and increase the country’s production and export capacity.
Many HIPC are not able to realise their full export potential due to supply-side constraints.
Indeed, high levels of debt are often the result of the inefficient use of investment resources in the
past, e.g. for the development of infrastructure. In this context, trade policy reform, covering borderand behind-the-border measures, can complement efforts to overcome structural weaknesses and anti-
competitive domestic policy practices and introduce more market-driven institutions and decision-
making into often highly distorted domestic economies.
While at present the empirical results on the economic performance of different groups of
HIPC are only preliminary and indicative, the available evidence suggests that the set of policy reform
requirements expected from countries participatin g in the Initiative is positively linked to income,
investment, and integration into the world market. Countries that have reached economic stability and
started to implement policy reforms in the cont ext of their Poverty Reduction Strategies have
performed better overall during 1997-2001 than countries that are less advanced in their policy reform
programmes, which, however, still did better than countries that had not yet attained economic
stability and started with domestic reforms. These findings need, however, to be verified throughcareful econometric analysis, once a sufficiently comprehensive time-series of relevant economic data
becomes available. Such analysis might also shed light on the causality of success. In particular, it
might make it possible to establish whether participating countries have performed well because of
the HIPC requirements associated with debt relief, or whether good policies and relatively good
economic performance in the past have made it easier for them to qualify for debt-relief.
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I. BACKGROUND
1. This study reviews experiences in Heavily Indebted Poor Countries (HIPC) with respect to
the impact of reforms of trade and trade-related policies on economic performance, export capacity
and the ability to attract foreign direct investment. It presents preliminary evidence on the effects of
the HIPC policy reform and debt relief programme, drawing mainly on reports of the World Bank andWT/WGTDF/W/19
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the WTO. The analysis complements work undertaken by other organisations and OECD Committees.
In particular, the project recently initiated by the World Bank on “Trade, Aid and Debt in HIPC”
focuses largely on market access issues, while the ongoing work of the OECD’s Development
Co-operation Directorate (DCD) on HIPC involves primarily the monitoring of debt levels. Some
other DCD activities with a broader country range, notably those on good governance, conflict andpeace, and trade, development and capacity building, are also of relevance, even though they do not
necessarily have a trade policy reform focus. Moreover, the OECD’s Export Credit Group is
continuing to monitor export credit flows to HIPC w ith a view of ensuring that they are not used for
unproductive expenditures.
2. The remainder of the document is organised in two parts. Section 2 provides a brief
description of the HIPC Initiative. Section 3 then reviews the economic, trade and investment
performance of HIPC during the five-year period 1997-2001 and reports on recent reform efforts in anumber of countries.
II. THE HIPC INITIATIVE
3. In the early 1990s, it became more and more apparent that the external debt situation for a
number of low-income countries, notably those in Africa, had become extremely difficult. For these
countries, even full use of traditional mechanisms of rescheduling and debt reduction together withcontinued provision of concessional financing and pursuit of sound economic policies appeared not to
be sufficient to attain sustainable external debt levels within a reasonable period of time and without
additional external support. In September 1996, the IMF and the World Bank launched the HIPC
Initiative to address the situation by offering debt relief to eligible countries that were pursuing sound
economic policies to help reduce their external debt burden to sustainable levels. Following a majorreview, the Initiative was significantly enhanced in 1999 to provide more rapid qualification and
deeper and broader debt relief to a larger number of countries conditional on a commitment to poverty
reduction.
4. Debt relief under the HIPC Initiative is subject to successful adjustment and policy reform.
All countries requesting assistance must in principle have (i) established a record of macroeconomicstability and economic reforms (ii) adopted a Poverty Reduction Strategy Paper (PRSP) by the
decision point, the date at which the Executive Boards of the IMF and World Bank formally
determine a country's eligibility for debt relief; and (iii) have made progress in implementing this
strategy for at least one year by the completion point, the time when  multilateral, bilateral and
commercial creditors pursue reductions in the net present value of their claims sufficient to reduce the
country's debt to a sustainable level. During the period between the decision and the completion
points, the World Bank and the IMF are providing “interim relief”, while bilateral and commercialcreditors are generally expected to reschedule obligations coming due. The total cost of assistance
provided or committed to the 42 HIPC amounts to about $37.2 b illion (in 2001 presen t value terms).
An approximately equal share of this cost falls on bilateral and multilateral creditors. A detailed
description of the HIPC Initiative is contained in the World Bank’s communication to the WG-TDF of
September 2002 (World Bank, 2002).
5. By the end of 2002, 42 countries had been identified by the IMF and World Bank as being
HIPC. Of these countries, six had reached the completion point, for 20 debts relief had been approved
at decision point, 12 had not yet reached decision point, and four had been characterised as countries
with potentially sustainable debt levels. The vast majority of HIPC (34 countries) are located in
Africa, while four countries each in Asia and La tin America are covered by the Initiative. Twenty-
four of the 42 HIPC are classified by the United Nations as Least Developed Countries (LDCs).
Table 1 provides an overview of the status of HIPC.WT/WGTDF/W/19
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III. RECENT ECONOMIC, TRADE AND INVESTMENT PERFORMANCE IN HIPC
6. The relationship between trade, finance and debt is complex. Many domestic, border and
external policies influence a country’s trade performance and financial sustainability. Literature
reviews on the linkages between trade and finance (WTO, 2002b) and trade and debt (WTO, 2002c)
have highlighted a number of relevant factors. The following discussion focuses on the contribution oftrade and trade-related policy reforms to improvements in trade capacity and linkages to foreign direct
investment.
7. Trade policy reform can be crucial for succe ss in international markets. Opening domestic
markets will change relative prices, induce adjustments in consumption and production patterns to
reflect comparative advantage and, hence, lead to a more efficient use of resources. The resulting
efficiency gains will tend to translate into higher levels of economic growth, which in turn make
investments from domestic and foreign sources more attractive and increase the country’s productionand export capacity.
8. Many HIPC are not able to realise their full export potential due to supply-side constraints.
Indeed, high levels of debt are often the result of the inefficient use of investment resources in the
past, e.g. for the development of infrastructure. In this context, trade policy reform, covering border
and behind-the-border measures, can complement efforts to overcome structural weaknesses and anti-competitive domestic policy practices and introduce more market-driven institutions and decision-
making into often highly distorted domestic economies.
9. Trade policy reforms can also contribute to alleviating poverty and fostering pro-poor growth.
In many cases, protection favours vested interests of the socio-political elite at the expense of the
country’s less well-off population. The HIPC Initiative is explicitly aimed at reducing poverty inparticipating countries and changes in trade policies can form an integral component of the Poverty
Reduction Strategy programmes of the participants, even though in some of the early conditionality
programmes, such as those in Uganda, trade aspects seem to have received little consideration
(Mijumbi, 2001). The sometimes inadequate integratio n of trade policy reform elements in PRSPs is
actively being addressed and increased attention in PRSPs, which are supposed to be prepared bynational governments in a participatory process involving a broad range of relevant stakeholders, is to
be devoted, for example, to the link between cust oms reform and governance and the impact of the
imminent liberalisation of textiles trade on HIPC economies.
10. Since the HIPC Initiative in its enhanced form was launched less than four years ago and the
first country, Uganda, reached completion point just in May 2000, any evaluation of the success of the
HIPC Initiate can only be indicative and preliminary. For example, the available anecdotal evidence
regarding the success of reforms of trade and trade-related policies (Box 1) is mixed and difficult tolink to the recent economic and trade performance of HIPC. Moreover, data on economic
developments in HIPC should be interpreted with care, as there is generally considerable uncertainty
concerning the statistical quality of the information. Also, the short-term performance of particular
countries (see Annex) is often related to external  factors, like commodity price developments, and
only partly dependent on domestic policy choices.WT/WGTDF/W/19
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Table 1:  Status of Heavily Indebted Poor Countries
Country HIPC-Decision
PointHIPC-Completion
PointLDC-Status WTO
memberLast
TPR
Countries that have reached completion point
Bolivia Feb-00 Jun-01 Sep-95 Jul-99Burkina Faso Jul-00 Apr-02 LDC Jun-95 Nov-98Mauritania Feb-00 Jun-02 LDC May-95 Sep-02Mozambique Apr-00 Sep-01 LDC Aug-95 Jan-01Tanzania Apr-00 Nov-01 LDC Jan-95 Mar-00
Uganda Feb-00 May-00 LDC Jan-95 Dec-01
Countries that have reached decision point
Benin Jul-00 .. LDC Feb-96 Sep-97
Cameroon Oct-00 .. Dec-95 Jul-01Chad May-01 .. LDC Oct-96Ethiopia Nov-01 ..
Gambia Dec-00 .. LDC Oct-96
Ghana Feb-02 .. Jan-95 Feb-01Guinea Dec-00 .. LDC Oct-95 Feb-99Guinea-Bissau Dec-00 .. LDC May-95Guyana Nov-00 .. Jan-95Honduras Jul-00 .. Jan-95
Madagascar Dec-00 .. LDC Nov-95 Feb-02
Malawi Dec-00 .. LDC May-95 Feb-02Mali Sep-00 .. LDC May-95 Nov-98Nicaragua Dec-00 .. Sep-95 Oct-99Niger Dec-00 .. LDC Dec-96Rwanda Dec-00 .. LDC May-96
São Tomé and Principe Dec-00 ..
Senegal Jun-00 .. LDC Jan-95Sierra Leone Mar-02 .. LDC Jul-95Zambia Dec-00 .. LDC Jan-95 Oct-02
Countries that have not yet reached decision point
Burundi .. .. LDC Jul-95
Central African Republic .. .. LDC May-95
Comoros .. ..
Congo .. .. Mar-97Congo, Dem. Rep. .. .. LDC Jan-97Côte d’Ivoire .. .. Jan-95 Jul-95Lao P.D.R. .. ..
Liberia .. ..
Myanmar .. .. LDC Jan-95Somalia .. ..Sudan .. ..Togo .. .. LDC May-95 Jan-99
Countries with potentially sustainable debt levels
Angola n.a. n.a. LDC Nov-96
Kenya n.a. n.a. Jan-95 Jan-00
Viet Nam n.a. n.a.Yemen n.a. n.a.
n.a.:  not applicable.
Source :  OECD Secretariat based on World Bank and WTO information.
11. WT/WGTDF/W/19
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Box 1:  Reforming trade and trade-related policies in HIPC:  some examples
Many developing countries have made progress since the mid-1990s in the “primary
agenda” of domestic trade policy reform, such as tariff reduction, conversion of non-tariff barriers, or
reduction in the dispersion of tariff rates. For example, Mauritania reduced its average tariff from
19 per cent in 1996 to 10.6 per cent in 2001. The country also consolidated its tariff structure,
reducing maximum rates from 180 per cent to 20 per cent (World Bank, 2001a).
With border duties falling in many countries, some HIPC have started to develop legislation
on new anti-dumping, as well as countervailing and safeguard measures. For example, Malawi seems
to be heading towards a more extensive use of trade remedies, even at the risk of thereby protecting
inefficient industries (WTO, 2002e). However, some countries, such as Cameroon, have legislation
regulating contingency trade measures in place, but have not yet applied such trade policy instruments
(WTO, 2001a).
Customs procedures are a major problem in many developing countries. One of the three
pilot diagnostic studies carried out in the context of the Integrated Framework investigated trade
policies in Cambodia (a moderately-indebted, low- income country), and found that 99 per cent of
trading firms identified Cambodian customs as their biggest constraint (World Bank, 2001b). Some
countries have started to address these problems by streamlining customs procedures, for example,
through opening single-window facilities, such as in Cameroon (WTO, 2001a).
One continuing problem in many HIPC is that customs procedures might appear clear on
paper, while in practice they turn out to be rather cumbersome and discretionary, thereby discouraging
foreign trade (WTO, 2002d). The lack of integrity of public officials is part of the problem. A recent
poll found that in Bolivia people rank corruption as the third biggest problem in the country, after
poverty and unemployment (Andersen and Nina, 2001).  Civil service reforms to increase efficiency,
transparency and accountability and decentralise government functions have been launched in 1999,
but progress has been delayed by resistance from vested interests (World Bank, 2002b).
In addition to border measures, other types of regulations, such as government procurement
practices, have recently undergone reforms in some HIPC. For example, in Malawi new legislation to
improve transparency and monitoring of public procurement and to organise open tenders has been
under discussion (WTO, 2002e). In Cameroon, wider tender announcements have been established,
independent audits for large contract awards have been put in place, and more regular monitoring
activities have been instigated (WTO, 2001a).
One major problem for many HIPC is their highly concentrated export base, which makes
them vulnerable to adverse price developments in world markets for their export products. In
Mauritania, for example, 99 per cent of all exports are primary products (fish and minerals). Attempts
at diversifying the range of exports has often stumbled due to the countries’ inability to attract foreign
investors that could have assisted, for example, in the processing, packaging and distribution of agro-
food products.
Another serious deficiency in many HIPC is the relatively poor integration of domestic and
international markets due to high transport and handling costs. The lack of or poor state of port, rail
and road infrastructure gives rise to high shipping costs that erode the benefits from trade. For
example, in Cambodia port charges are four times higher than in neighbouring Thailand (World Bank,
2001b). Moreover, because of the small size of domestic HIPC markets, transport companies can
relatively easily obtain dominant positions and stifle competition. For example, there are only two
(foreign-owned) maritime shipping companies operating in Mauritania, and shipping rates quoted for
container shipments from Baltimore to Nouakchott ar e between two and three times higher than those
from Baltimore to Hong Kong/China, despite the fo rmer route’s shorter shipping distance (World
Bank, 2001a).WT/WGTDF/W/19
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12. In this context, it might be helpful to compare economic developments in country-groups that
differ with respect to the stage of reform under the HIPC Initiative in order to reduce the overall
influence of idiosyncratic factors that affect the pe rformance of individual countries. In the following
this is done for three country clusters:  (i) countries that had reached the completion point by the end
of 2002, (ii) countries that had reached the decision point by then, and (iii) countries had not yetestablished a sufficient record of macroeconomic stability and economic reform to be considered for
debt relief. The countries in the different groups are shown in Table 1, while a comparison of
economic indicators is undertaken in Figure 1.
13. The results from the group comparison show that countries that have reached economic
stability and started to implement policy reforms in the context of their Poverty Reduction Strategies
have overall performed better during 1997-2001 than countries that are less advanced in their policy
reform programmes, which, however, still did better than countries that had not yet attained economicstability and started with domestic reforms. Only in the six countries that had reached completion
point was aggregate GDP in 2001 higher than in 1997, while it fell over time in the other two country
groups. Investment for “completion point countries” in  2001 was more than 30 per cent higher than in
1997, while it increased by less than 10 per cent in “decision point countries” and fell in “pre-decision
point HIPC”. Qualitatively similar results are obtained for exports and imports. All three countrygroups experienced increases in the stock of foreign direct investment during the late 1990s, but the
largest inflows are once again observed for “completion point HIPC”. Any inference on the
effectiveness of trade policy reforms should be cautious, though, as it seems at this point in time
virtually impossible to determine what the relative contribution of reforms of trade and trade-related
policies vis-à-vis  other policy reforms to the overall performance of countries has been.
Figure 1:  Developments in economic indicators in different groups of HIPC
(current US$, percentage change during 1997-2001)
-20%-10%0%10%20%30%40%
Gross domestic product Gross capital formation Exports Imports FDI stocks *HIPC, completion point HIPC, decision point HIPC, pre-decision point
*)  average annual growth during 1995-2001.
Note:  only those countries were included in the comparisons, for which data for 2001 was available.Source :  OECD Secretariat based on World Bank (2002c) and Unctad (2002).
14. In the two groups of countries that reached decision point and completion point, respectively,
imports increased faster than exports, implying a deterioration of the trade balance. Over a longer timeWT/WGTDF/W/19
Page 8
period, such a development could compromise the countries’ ability to service their debt, and, hence,
undermine the objectives of the HIPC Initiative. Howeve r, in the context of strong short-term inflows
of foreign direct investment, the surge in imports might well be due to purchases by foreign investors
of capital goods abroad. These imports increase the productive capacity of the countries and make it
possible for them to increase their output and exports in the future.
15. While at present the empirical results on the economic performance of different groups of
HIPC are only preliminary and indicative, the available evidence suggests that the set of policy reform
requirements expected from countries participatin g in the Initiative is positively linked to income,
investment, and integration into the world market. Receiving debt relief while maintaining economic
stability and continuing with domestic reforms has the potential to free resources for investment and
attract additional foreign investors, and by doing so  improve the long-term growth prospects of HIPC.
However, it should be noted that the observed effects so far are likely to be only to a very limitedextent related to actual reductions in debt levels, which started for the first countries only very
recently.
16. The tentative findings will need to be verified through careful econometric analysis, once a
sufficiently comprehensive time-series of relevant economic data becomes available. A number of
related questions might thereby warrant more profound examination:  What have been theconsequences of earlier structural adjustment programmes in HIPC?  How have trade policy reforms
been carried through?  What are the short-term versus  long-term effects of trade liberalisation?  How
has debt relief influenced trade performance?  What has been the impact of trade policy reform on
tariff revenues?  What has been the effect of international crisis, such as the HIV/AIDS epidemic or
the Asian financial crisis on HIPC?  Have trade and FDI been complements or substitutes?  Suchanalysis might also shed light on the causality of success. In particular, it might make it possible to
establish whether participating countries have performed well because of the HIPC requirements
associated with debt relief, or whether good policies and relatively good economic performance in the
past have made it easier for them to qualify for debt-relief.WT/WGTDF/W/19
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REFERENCES
Andersen, L.E. and O. Nina, 2001.  “The HIPC Initiative in Bolivia.”  Canadian Journal of
Development Studies  22(2):  343-375.
Mijumbi, P.B., 2001.  “Uganda’s External Debt and the HIPC Initiative.”  Canadian Journal of
Development Studies  22(2):  496-525.
UNCTAD (United Nations Conference on Trade and Development), 2002.  World Investment Report:
Transnational Corporations and Export Competitiveness .  Geneva:  United Nations.
World Bank, 2001a.  “Mauritania:  A Poverty Focused Trade Strategy.”  Integrated Framework
Diagnostic Trade Study, Washington D.C.:  The World Bank.
World Bank, 2001b.  “Cambodia:  An Integration and Competitiveness Study.”  Integrated
Framework Diagnostic Trade Study, Washington D.C.:  The World Bank.
World Bank, 2001c.  “Madagascar:  Increasing Integration into World Markets as a Poverty
Reduction Strategy.”  Integrated Framework Diag nostic Trade Study, Washington D.C.:  The World
Bank.
World Bank, 2002a.  “Debt Relief for Sustainable Development.”  WTO document
WT/WGTDF/W/12, Geneva.
World Bank, 2002b.  “Civil Service Reform:  Strengthening World Bank and IMF Collaboration.”
Washington, D.C.:  The World Bank.
World Bank, 2002c.  World Development Indicators .  Electronic data product.  Washington, D.C.
WTO (World Trade Organization), 2001a.  Trade Policy Review:  Cameroon .  Geneva:  WTO.
WTO (World Trade Organization), 2001b.  Trade Policy Review:  Madagascar .  Geneva:  WTO.
WTO (World Trade Organization), 2002a.  “Report of the Working Group on Trade, Debt and
Finance to the General Council.”  WTO document WT/WGTDF/1, Geneva.
WTO (World Trade Organization), 2002b.  “The Relationship between Trade and Finance:  A Review
of Selected Literature Related to Financial Crisis”.  WTO document WT/WGTDF/W/4, Geneva.
WTO (World Trade Organization), 2002c.  “The Relationship between Trade and Debt:  A Review of
Selected Literature”.  WTO document WT/WGTDF/W/9, Geneva.
WTO (World Trade Organization), 2002d.  Trade Policy Review: Mauritania .  Geneva:  WTO.
WTO (World Trade Organization), 2002e.  Trade Policy Review: Malawi .  Geneva:  WTO.WT/WGTDF/W/19
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ANNEX
Recent economic and trade performance in selected HIPC
In the following, selected economic, trade, and investment indicators are compared over the
five year period from 1997, the year when the first countries reached decision point under the originalHIPC Initiative, and 2001, the latest year for which data are available.  The analysis is centred on the
six HIPC that had reached completion point by the end of 2002 and, hence, have already started to
successfully implement their Poverty Reduction Strategies.  These countries are Bolivia, Burkina
Faso, Mauritania, Mozambique, Tanzania, and Uganda .  Annex Table 1 provides an overview of the
development of key economic indicators in the six countries.
Annex Table 1:  Developments in economic indicators in selected HIPC
(current US$, 1997 = 100)
Gross domestic product
1997 1998 1999 2000 2001
Bolivia 100 106 105 105 100Burkina Faso 100 109 108 96 102Mauritania 100 91 87 90 94
Mozambique 100 114 117 112 105
Tanzania 100 112 110 117 119Uganda 100 108 102 98 91
Gross capital formation
1997 1998 1999 2000 2001
Bolivia 100 130 98 97 ..Burkina Faso 100 117 103 93 103
Mauritania 100 99 88 147 140
Mozambique 100 142 201 203 175Tanzania 100 101 117 140 148Uganda 100 101 104 111 106
Exports
1997 1998 1999 2000 2001
Bolivia 100 100 86 87 ..Burkina Faso 100 135 108 88 102
Mauritania 100 93 86 92 90
Mozambique 100 107 121 153 286Tanzania 100 86 95 104 105Uganda 100 84 88 76 72
Source :  World Bank, 2002c.
There is no clear and common trend in economic indicators across the six countries. GDP
increased by 19 per cent in Tanzania during the period 1997-2001, but fell by 9 per cent in Uganda.
Moreover, developments over time were not smooth, but showed considerable variation. The five
countries, for which data on gross capital formation in 2001 were available, all had higher investment
in 2001 than five years earlier, but again with intermediate peaks and troughs in individual countries.
The largest variation in the country group can be observed for exports, where Mozambique almost
tripled the value of its foreign sales during 1997-2001,1 while exports fell by nearly 30 per cent in
Uganda.
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1 The strong export performance of Mozambique is related to the privatisation programme
implemented since the late 1980s and recent large-scale investments by foreign companies, e.g. in aluminium
smelting.