Is Good Governance Rewarded? A Cross-national Analysis of Debt Forgiveness

Abstract

This article analyzes which factors determine the allocation of debt forgiveness. In particular, the role played by various aspects of governance is examined. The results indicate that countries' need is a powerful determinant for debt forgiveness, whereas creditors' political interest is not, apart from United States military interests. Of the various aspects of governance, only the extent to which governments are accountable, respect democratic rights as well as refrain from imposing burdens on business have a statistically significant influence. In order to create the right incentives and to ensure effectiveness of scarce financial resources, countries with good governance should be rewarded with a higher share of total debt forgiveness in the future.