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Flujosdeayudaentiemposde Crisis CONFERENCE ON DEVELOPMENT COOPERATION IN TIMES OF CRISIS AND ON ACHIEVING THE MDGs
... Bulir and Hamann (2008), Treasurry (2005), Birdsall (2004), OECD (2003) and many others highlighted that volatility and unpredictability of ODA shocks is a severe macroeconomic management problem to the LDCs. There is a few studies (Bulir and Hamann, 2008;Dang et al., 2009;Frot, 2009;Mendoza, Jones and Vergara, 2009;Minoiu, Zanna and Dabla-Norris, 2010;Mold, Prizzon, Frot and Santiso, 2010) that examine the effects of the financial crisis on donor countries ODA flows.Dang et al. (2009)points out that crisis affected donor countries have reduced their ODA flows by an average of 20 to 25 percent and bottom out only about a decade after the banking crisis;Roodman (2008), Frot (2009argue that the recent financial crisis will slump the ODA flows. This is supported by the reduction of ODA disbursements following to the Nordic financial crisis in 1990's. ...
... However, the empirical evidences, methodologies and analyses of these studies are not sufficiently rigorous. The paper of Roodman (2008) andMold et al. (2010)are more discussion oriented and provides less empirical evidence regarding their hypotheses. Furthermore,Roodman (2008)Besides, they do not verify their specification using alternative estimations for robustness checks and sensitivity of the results.Minoiu et al. (2010) andDang et al. (2009)estimate panel data using fixed effects estimation. ...
This paper evaluates whether the exogenous component of the global financial crisis affects OECD-DAC EU donor countries ODA disbursements to the LDCs and how it impacts on LDCs economic prosperity. Using both static and dynamic panel techniques, we find that global financial crisis in OECD-EU donor countries are causes for the significant downside of ODA flows to the LDCs. Consequently it adversely affects through the various transmission channels (e.g. ODA disbursements, remittances, bilateral financial flows, export growth) to the LDCs economic growth. Our results also explore that due to countercyclical role of ODA flows from the donors’ largely affect to the LDCs economic development process negatively. The robustness checks using alternative estimation technique supports our original estimation results in every context.
This paper estimates the external financing needs of the developing world over the periods 2000-2009 and 200-2015, using a savings gap model. In particular, it projects the external financing required to achieve the international target of halving extreme poverty by 2015 in each developing region of the world. According to the projections, the external finance requirements far exceed even a very optimistic scenario of abundant capital flowing from the North to the South.
Wolf for insightful suggestions. Abstract One desire of banking regulation is that the points of market failure meet the points of regulation. This does not appear to be the case for Basle II. The new capital accord for banks is complex where it should be simple; is more pro-cyclical than counter-cyclical; is lenient on large banks when it should lean more heavily on them; focuses on processes rather than results; and assumes that diversifying a developed country loan portfolio with developing country borrowers adds to risk rather than reduces it. In each case, regulation misses the main market failure to the benefit of large international banks and the detriment of developing countries. This may be explained by the governance of international bank regulation. There is no representation of emerging economies on the Basle Committee despite the greater size of some non-represented countries like India, China and Brazil, as compared to many of the countries that are represented. This governance structure not only challenges notions of equity, but is also leading to inefficient outcomes. It is important that both the composition of the Basle Committee and Basle II changed, so that developing countries interests and concerns are represented.
ABSTRACT This paper analyses the channels through which the economic and fi nancial crisis of 2008-2009 is transmitted to fragile countries in Sub-Saharan Africa. Trade stands out as the main direct channel, even though intra-Africa remittances play a relevant role, given that most migrants in Sub-Saharan Africa fragile countries cannot afford the cost of migrating to Europe or to the United States and stay close, remaining in the continent. Whether reduced aid flows also act as a crisis transmission channel remains an open question, even though preliminary estimates suggest that, at least in the medium run, OECD countries are likely to lower aid, with potentially very damaging eff ects on fragile countries. The paper also shows that fragile countries are characterised by very low resilience and capacity to cope with shocks. It concludes, by highlighting how Sub- Saharan Africa fragile countries’ policymakers’ room for manoeuver,is limited in periods of crisis because of low fiscal space and limited institutional capacity. It advocates that the right response to the crisis would be to mobilise domestic resources, although this will require functional institutions able to off set the potential trade-offs between,adverse short-term shocks and a long-term perspective. Giorgia Giovannetti ERD Team Leader, Dipartimento di Economia, Università di Firenze, and European University Institute, San Domenico di Fiesole e-mail: giorgia.giovannetti@eui.eu Franklin Allen ERD Team Member, Wharton School, University of Pennsylvania e-mail: allenf@wharton.upenn.edu FRAGILE COUNTRIES AND THE CURRENT ECONOMIC CRISIS The views expressed in this paper are those of the authors, and should not be taken to be the views of
The term ‘country ownership’ refers to a property of the conditionality attached to programmes, processes, plans, or strategies involving both a ‘domestic’ party (generally a nation state) and a foreign party (generally the IMF, the World Bank, the Regional Development Banks, and other multilateral and bilateral institutions). Under what circumstances and how can the concept of country ownership be relevant to a country with a myriad heterogeneous and often conflicting views and interests? Or to a country whose government's representational legitimacy or democratic credentials are in question? The author argues that the term has been abused to such an extent that it is at best unhelpful and at worst pernicious: a term whose time has gone.
The global financial crisis has already led to sharp downturns in the developing world. In the past, international aid has been able to offset partially the effects of crises that began in the developing world, but because this crisis began in the wealthy countries, donors may be less willing or able to increase aid in this crisis. Not only have donor-country incomes fallen, but the cause of the drop -- the banking and financial-sector crisis -- may exacerbate the effect on aid flows because of its heavy fiscal costs. This paper estimates how donor-country banking crises have affected aid flows in the past, using panel data from 24 donor countries between 1977 and 2007. The analysis finds that banking crises in donor countries are associated with a substantial additional fall in aid flows, beyond any income-related effects, perhaps because of the high fiscal costs of crisis and the debt hangover in the post-crisis periods. In most specifications, aid flows from crisis-affected countries fall by an average of 20 to 25 percent (relative to the counterfactual) and bottom out only about a decade after the banking crisis hits. In addition, the results confirm that donor-country incomes are robustly related to per-capita aid flows, with an elasticity of about 3. Because all donor countries are being hit hard by the current global recession, and several have also suffered banking-sector crises, there are reasons to expect that aid could fall by a significant amount (again, relative to the counterfactual) in the coming years -- just when aid may be most clearly justified to help smooth exogenous shocks to developing countries.
Analyzing US economic and foreign aid data from 1967 to 2007, this paper investigates whether adverse economic and financial conditions are negatively linked to official development assistance (ODA). It finds empirical evidence that US ODA has tended to decline as its economic conditions worsen. A 1 unit increase in the misery index (sum of inflation and unemployment) is associated with a roughly 0.01 percentage point decline in US ODA expressed as a share of GNI. Furthermore, an increase in financial volatility from 1 percent to 2 percent (measured by the standard deviation of the rate of return of the S&P500) is associated with a decrease in US ODA by about $2.78 billion. Informed by the empirical results in this paper, and based on very rough guesstimates, a potential decline in US ODA of anywhere from 13 to 30 percent could occur depending on the severity of the economic conditions in 2009. This predicted decline in ODA is much lower than some of the guesstimates so far by different analysts. Based on the US historical pattern, ODA is indeed at risk; nevertheless, it need not decline significantly during adverse economic times.
The paper examines the effects of aid and its volatility on consumption, investment, and the structure of production in the context of an intertemporal two-sector general equilibrium model, calibrated using data for aid-dependent countries in Africa. A permanent flow of aid mainly finances consumption rather than investment--consistent with the historical failure of aid inflows to translate into sustained growth. Large aid flows are associated with higher real exchange rates and smaller tradable sectors because aid is a substitute for tradable consumption. Aid volatility results in substantial welfare losses, providing a motivation for recent discussions of aid architecture stressing the need for greater predictability of aid. These results are also consistent with evidence from cross-country regressions of manufactured exports, presented later in the paper.
How does the management and resolution of the current crisis compare with the response of the Nordic countries in the early 1990s, widely regarded as exemplary? We argue that, while intervention has been prompter, the measures taken so far remain less comprehensive and in-depth. In particular, the cleansing of balance sheets has proceeded more slowly, and less attention has been paid to reducing excess capacity and avoiding competitive distortions. In general, policymakers have given higher priority to sustaining aggregate demand in the short term than to encouraging adjustment in the financial sector and containing moral hazard. We argue that three factors largely explain this outcome: the more international nature of the crisis; the complexity of the instruments involved; and, hardly appreciated so far, the effect of accounting practices on the dynamics of the events, reflecting in particular the prominent role of fair value accounting (and mark to market losses) in relation to amortised cost accounting for loan books. There is a risk that the policies followed so far may delay the establishment of the basis for a sustainably profitable and less risk-prone financial sector.
This paper surveys the increasing international use of sanctions over the past century. Sanctions are a form of action taken by one state or by collective action to influence another state to change its behavior, as a substitute for welfare. They generally involve restrictions on foreign trade, either of all goods or of specific commodities. Sanctions have generally been imposed by larger countries on smaller countries. Sanctions have had a mixed success rate, depending on the costs imposed on the targeted nation, their response to these costs, and the impact on the economy and public opinion in other nations.
The literature on aid has come a long way in recent years, and as a result we now know much more about aid effectiveness than possibly ever before. But significant gaps in knowledge remain. One such gap is the effectiveness of aid in the so-called ?fragile states?, countries with critically low policy and institutional performance ratings. The current paper addresses this void by examining possible links between aid and economic growth in fragile states. It finds that: (i) growth would have been 1.4 percentage points lower in highly fragile states in the absence of aid to them, compared to 2.5 percentage points in other countries; (ii) highly fragile states from a per capita income growth perspective can only efficiently absorb approximately one-third of the amounts of aid that other countries can, and; (iii) while from the same perspective most fragile states are under-aided, to the extent that they could efficiently absorb greater amounts of aid than they currently receive, many of the highly fragile states are substantially over-aided in this sense. The overall conclusion is that donors need to look very closely at their aid to the sub-set of fragile states deemed in this paper as highly fragile.
IntroductionAid Predictability and EffectivenessPatterns of Predictability in Donor-Reported Aid DataThe Consequences of Low Aid PredictabilityConclusions and Policy ImplicationsAppendix 1. Data Definitions and Sources for OECD-DAC Data and the Explanatory VariablesAppendix 2. Data Compilation Issues for IMF Programme DataReferences
We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capita. Once the effect of institutions is controlled for, countries in Africa or those closer to the equator do not have lower incomes. (JEL O11, P16, P51).
This book presents an original approach to understanding the relationship between official aid agencies and aid-receiving African governments. The first part provides a challenge to the hazy official claims of aid donors that they have stopped trying to force African governments to do what 'we' think is best for 'them' and instead are now promoting African 'ownership' of the policies and projects which foreign aid supports. The authors tease out the multiple meanings of the term 'ownership', demonstrating why it became popular when it did, but also the limits to this discourse of ownership observed in aid practices. The authors set out to defend a particular vision of ownership-one that involves African governments taking back control of their development policies and priorities. Based largely on interviews with the people who do the negotiating on both sides of the aid relationship, the country case studies put the rhetoric of the new aid system to a more practical test. The authors ask how donors seek to achieve their policy objectives without being seen to push too hard, what preconditions they place on transferring authority to African governments, and what effect the constant discussions over development policy have on state institutions, democracy and political culture in recipient countries. It investigates the strategies that African states have adopted to advance their objectives in aid negotiations and how successful their efforts have been. Comparing the country experiences, it points out the conditions accounting for the varying success of eight African countries: Botswana, Ethiopia, Ghana, Mali, Mozambique, Rwanda, Tanzania and Zambia. It concludes by asking whether the conditions African countries face in aid negotiations are changing.
Development aid donors disburse aid to many developing coun-tries. This paper shows that whether a partnership is established early or late matters significantly for aid quantities. Donor countries allocate larger shares of their aid budgets to recipients that entered early in their portfolios. This effect is large compared to variations due to recipients' income differences, and matters even in the long run. Entry dates are weakly related to GDP per capita, but are in-fluenced strongly by colonial past. On the other hand, colonial rela-tionships explain only a small part of the observed variation in entry dates. These findings imply that donors, while continuously increas-ing their number of recipients, have allocated smaller aid quantities to new partnerships. This has direct consequences for aid fragmen-tation, with many donors disbursing small amounts to a recipient. I study a simple reform that eliminates "small" partnerships, but leaves unaffected donor aid budgets and developing countries receipts. The reform reshuffles only about 20 percent of all the aid disbursed in a year but drastically reduces fragmentation.
This note provides background data and analysis on what has been happening to aid flows and the resulting change in aid architecture. It is based on data taken from the OECD/DAC and on a review of the literature. Key numbers on development assistance trends: * Net official development assistance (ODA) from the 22 DAC member countries has increased to over 38 billion in net country programmable aid (CPA). * Sub-Saharan Africa is especially hard hit by this wedge between ODA and CPA. It only received 8 billion in ODA and 58-68 billion per year, although aggregate data is sketchy. * Total aid flows to developing countries therefore currently amount to around $180 billion annually. Key trends in aid architecture: * Multilateral aid agencies (around 230) outnumber donors and recipients combined. * Multilaterals only disburse 12 percent of total aid (official plus private), and about one-quarter of total net CPA. * Multilaterals disburse more towards Africa than do bilaterals. * The average number of donors per country is growing, while average project size appears to be shrinking, implying growing fragmentation of aid. Key Issues: * Mechanisms for information sharing, coordination, planning and aid administration are increasingly costly and ineffective. * There is a growing need for efficient allocation rules for donors to fund the growing number of aid agencies, but assessments of aid agency effectiveness is in its infancy. * Scaling up, learning and innovation could advance as new players experiment with new methods, but would require more public and private sector exchanges.
Foreign aid is now a $100bn business and is expanding more rapidly today than it has for a generation. But does it work? Indeed, is it needed at all? Other attempts to answer these important questions have been dominated by a focus on the impact of official aid provided by governments. But today possibly as much as 30 percent of aid is provided by Non-Governmental Organizations (NGOs), and over 10 percent is provided as emergency assistance. In this first-ever attempt to provide an overall assessment of aid, Roger Riddell presents a rigorous but highly readable account of aid, warts and all. Does Foreign Aid Really Work? sets out the evidence and exposes the instances where aid has failed and explains why. The book also examines the way that politics distorts aid, and disentangles the moral and ethical assumptions that lie behind the belief that aid does good. The book concludes by detailing the practical ways that aid needs to change if it is to be the effective force for good that its providers claim it is.
This paper examines the factors affecting the support for foreign aid among voters in donor countries. A simple theoretical model, which considers an endogenous determination of official and private aid flows, relates individual income to aid support and also suggests that government efficiency is an important factor in this regard. The empirical analysis of individual attitudes, based on the World Values Surveys, reveals that satisfaction with own government performance and individual relative income are positively related to the willingness to provide foreign aid. Furthermore, using actual donor country data we find that aid is adversely affected by own government inefficiency.
This paper attempts to identify the underlying principles of aid allocation, and particularly the balance of motivations as between the needs of recipient countries and the interests of donor countries. Two alternative models are fitted by cross-country regressions to bilateral and multilateral aid flows to some 80 developing countries in 1969–1970 and 1978–1980. The first (recipient need) model assumes that all aid is given to compensate for shortfalls in domestic resources. This model provides a reasonable explanation for the distribution of multilateral aid, but it is clearly not applicable for bilateral aid flows. The second (donor interest) model assumes that all aid serves only donor interests, defined to cover political/security investment and trade interests. This model gives generally good explanations of bilateral aid, but is a poor fit for multilateral aid. The relative importance of the various donor interests differs sharply among donors. The paper ends with an analysis of the shift in the balance of aid over the 1970s towards the recipient need element, and with a reference to the sharp change in policy in the 1980s towards increasing emphasis on donor interest aid.
The portfolio flows of institutional investors have been found to be highly persistent across countries and individual investment funds. This paper investigates the source of this persistence in emerging market equities. We employ the decomposition methodology in NBER Working Paper no. 9079 (July 2002), which decomposes the persistence of flows into four components: (i) own-country, own-fund persistence (which might arise from informed trading within each country by individual funds); (ii) own-country, cross-fund persistence (which might arise from asynchronicities across funds); (iii) cross-country, own-fund persistence (which might arise from asynchonicities within a fund) and (iv) cross-country, cross-fund persistence (which might arise from other reaction lags—such as contagion—across both countries and funds). We find evidence that all four components are positive in emerging markets. Our results differ from those in developed countries, in that we attribute approximately 10–20% of total persistence to cross-country effects (iii) and (iv). These findings are consistent with stories of contagion, which suggest that demand shifts move predictably from one country to another. They cannot easily be explained by informed trading alone or by wealth effects.
The political factors shaping IMF lending to developing countries have attracted attention in recent empirical work. This goes in particular for the role and influence of the US. However, scant formal modelling makes interpretation of empirical results difficult. In this paper, we propose a model in which the US acts as principal within the IMF and seeks to maximize its impact on the policy stance of debtor countries. We derive an optimal loan allocation mechanism, which leads to the testable hypothesis that the probability of an IMF loan is increasing in the amount of political concessions countries make. A political concession is defined as the distance between a country's bliss point and its actual policy stance measured relative to the US. We introduce a bliss-point proxy and demonstrate that our hypothesis is strongly supported in the data. Moreover, we show that not accounting for bliss points may lead to endogeneity bias in empirical work.
This paper studies the impact of aid volatility in a two-period model where production may occur with either a traditional or a modern technology. Public spending is productive and “time to build” requires expenditure in both periods for the modern technology to be used. The possibility of a poverty trap induced by high aid volatility is first examined in a benchmark case where taxation is absent. The analysis is then extended to account for self insurance (taking the form of a first-period contingency fund) financed through taxation. An increase in aid volatility is shown to raise the optimal contingency fund. But if future aid also depends on the size of the contingency fund (as a result of a moral hazard effect on donors' behavior), the optimal policy may entail no self insurance.
This paper documents a strong contemporaneous relationship between foreign equity trading and market volatility in Indonesia and Thailand. Although foreign selling accounts for only a small portion of daily trading, it has the highest explanatory power for market volatility in both countries. Trading within foreign and local investor groups is often negatively related to volatility. The findings are robust to different sub-periods and different measures for volatility and trading activities. We explore two economic explanations for the asymmetric effects of foreign and local investors.
Regulatory changes that appear comprehensive will have little impact on the functioning of a developing market if they fail to lead to foreign portfolio inflows. We specify a reduced-form model for a number of financial time series and search for a common, endogenous break in the data generating process. We also estimate a confidence interval for the break. Our endogenous break dates are accurately estimated but do not always correspond closely to dates of official capital market reforms. Indeed, the endogenous dates are usually later than official dates, highlighting the important distinction between market liberalization and market integration.
Emerging markets have long posed a challenge for finance. Standard models are often ill suited to deal with the specific circumstances arising in these markets. However, the interest in emerging markets has provided impetus for both the adaptation of current models to new circumstances in these markets and the development of new models. The model of market integration and segmentation is our starting point. Next, we emphasize the distinction between market liberalization and integration. We explore the financial effects of market integration as well as the impact on the real economy. We also consider a host of other issues such as contagion, corporate finance, market microstructure and stock selection in emerging markets. Apart from surveying the literature, this article contains new results regarding political risk and liberalization, the volatility of capital flows and the performance of emerging market investments.
Mozambique is highly aid dependent and both sovereignty and ownership are highly contested. Donors imposed policies and do not trust government, while allowing corruption in exchange for government following neo-liberal economic policies. It may be an unstable 'pathological equilibrium'.
Summary Much attention has been paid to helping economies in sub-Saharan Africa (SSA) to achieve the Millennium Development Goals (MDGs). The conventional instruments for providing assistance have been foreign aid disbursements and debt relief. But have debt relief initiatives complemented or substituted for other aid? Has debt relief been additional? This paper examines the evolving relationship between debt relief and other foreign aid in SSA using recently constructed and improved data. Estimating a model of aid allocation for 42 SSA countries using panel data for 1988-2006, it finds that the relationships between debt, debt relief, aid, and resource transfers have changed over time. This paper interprets how policy changes may have modified the underlying relationship between aid and debt relief.
When tourism's impressive potential for poverty alleviation is considered, the lack of attention is even more striking. Reasons for the apparent neglect are complex, and include a lack of awareness of tourism as an export sector, the fragmented nature of the industry and low political influence, exaggerated concerns over leakages , misunderstandings about poverty alleviation and tourism, and the poker playing characteristic of trade negotiations. The evident results are missed opportunities to address services infrastructure constraints (one of the greatest impediments to increasing LDC tourism revenues and value-added), as well as a failure to address sufficiently tourism's agricultural, industrial, and Aid for Trade linkages. Existing national-level investment promotion objectives, as well as DTIS and TPR reports can be helpful for identifying priorities for both GATS negotiations and Aid for Trade. The focus should not necessarily be on making GATS commitments, but rather on ensuring that the importance of tourism for LDCs is acknowledged and acted upon. Indeed, governments can always further liberalize on a unilateral basis; in the context of the DDA, however, they can request greater access to trading partners' markets in exchange, as well as gain valuable international attention and publicity.
Contents summary results on conditionality and economic policy reforms in twenty-one developing countries, 1980-1994. Incl. bibliographical notes and references, index, list of abbreviations
In this paper, we test the argument that the sizeable reduction in aggregate aid levels in the 1990s was due to the end of the Cold War. We test two different models using a dynamic econometric specification on a panel of 17 donor countries, spanning the years 1970-97. We find aid to be positively related to military expenditures in the former Eastern Bloc during the Cold War, but not in the 1990s, suggesting that the reductions in aid disbursements are driven by the disappearance of an important motive for aid. We also study the effect on aid allocation, but here we do not find any robust effects of the end of the Cold War.
The problem of the proliferation of the number of aid donors and aid channels continues to worsen. It is widely and plausibly believed that this significantly reduces the value of aid by increasing direct and indirect transactions costs. We contribute to the existing literature by: (a) categorising the apparent adverse effects of proliferation; (b) producing a reliable and fair indicator of the relative degree to which the main bilateral donors proliferate or concentrate their aid; (c) giving some explanation of why some donors proliferate more than others; (d) constructing a reliable measure of the extent to which recipients suffer from the problem of fragmentation in the sources of their aid; and (e) demonstrating that the worst proliferators among the aid donors are especially likely to be suppliers of aid to recipients suffering most from fragmentation. There are significant implications for aid policy.
The flow of capital between nations, in principle, brings benefits to both capital-importing and capital-exporting countries. But very large flows can also create new exposures and bring new risks. The failure to analyse and understand such risks, excessive haste in liberalising the capital account and inadequate prudential buffers to cope with the greater volatility in more market-based forms of capital allocation have at one time or another compromised financial or monetary stability in many emerging market economies. On the other hand, rigidities in capital account management can also lead to difficulties in macroeconomic and monetary management. This Report takes stock of the policy debate in this complex area over the past 20 years and examines the vulnerabilities associated with these capital movements. It finds that it is a combination of policies - sound macroeconomic policies, prudent debt management, exchange rate flexibility, the effective management of the capital account, the accumulation of appropriate levels of reserves as self-insurance and the development of resilient domestic financial markets - that provides the optimal response to the large and volatile capital flows to the EMEs. How these elements are best combined will depend on the country and on the period: there is no "one size fits all".
Over the past 20 years, public attitudes towards aid in OECD countries have remained steadily positive throughout economic ups and downs. At the same time, polling data shows that voters continue to strongly support aid to developing countries, despite the financial crisis.
At a time when the international dialogue surrounding development is focused on increasing the quantity of aid, this paper focuses on how the donor community can improve the quality of foreign assistance. The author discusses the problem of project proliferation, and the tendency of developing countries who receive aid to become overburdened by the costs of administering aid projects. Using a sophisticated mathematical modeling process, the author analyzes the relationship between total aid and recipient activity, and the distribution of projects by size. The conclusions hold insights for policy-makers: when projects proliferate beyond a certain point, the effective marginal utility of aid declines sharply, and can even become negative. This negative effect of aid on development can be especially true if the aid delivery process drifts away from the goal of poverty reduction. In practice, therefore, the author suggests that when countries reach their absorptive capacity, aid dollars given beyond that point lose much of their effectiveness. This paper is part of the Center for Global Development's ongoing work on aid effectiveness. To learn more about the potential negative effect of aid on development, and specifically institution-building, read Working Paper 71, "Fiscal Implications of Large Aid Increases."
In the new millennium, the Western aid effort towards Africa has surged due to writings by well-known economists, a celebrity mass advocacy campaign, and decisions by Western leaders to make Africa a major foreign policy priority. This survey contrasts the predominant "transformational" approach (West saves Africa) to occasional swings to a "marginal" approach (West takes one small step at a time to help individual Africans). Evaluation of "one step at a time" initiatives is generally easier than that of transformational ones either through controlled experiments (although these have been much oversold) or simple case studies where it is easier to attribute outcomes to actions. We see two themes emerge from the literature survey: (1) escalation. As each successive Western transformational effort has yielded disappointing results, the response has been to try an even more ambitious effort. (2) the cycle of ideas. Rather than a progressive testing and discarding of failed ideas, we see a cycle in aid ideas in many areas in Africa, with ideas going out of fashion only to come back again later after some lapse long enough to forget the previous disappointing experience. Both escalation and cyclicality of ideas are symptomatic of the lack of learning that seems to be characteristic of the "transformational" approach. In contrast, the "marginal" approach has had some successes in improving the well-being of individual Africans, such as the dramatic fall in mortality.
This paper studies the pattern of allocation of foreign aid from various donors to receiving countries. We find considerable evidence that the direction of foreign aid is dictated as much by political and strategic considerations, as by the economic needs and policy performance of the recipients. Colonial past and political alliances are major determinants of foreign aid. At the margin, however, countries that democratize receive more aid, ceteris paribus. While foreign aid flows respond to political variables, foreign direct investments are more sensitive to economic incentives, particularly "good policies" and protection of property rights in the receiving countries. We also uncover significant differences in the behavior of different donors. Copyright 2000 by Kluwer Academic Publishers
The authors estimate the responsiveness of aid to recipient countries' economic and physical needs, civil/political rights, and government effectiveness. They look exclusively at the post-Cold War era and use fixed effects to control for the political, strategic, and other considerations of donors. They find that aid and per capita income have been negatively related, while aid has been positively related to infant mortality, rights, and government effectiveness.
I provide an overall empirical assessment of the motivations of ODA granted by rich countries to developing countries, as revealed by aid allocation behaviors. Aid motives combine self-interested and altruistic objectives. I use a three-dimensional panel dataset, combining the donor, recipient and time dimensions, which shows a lot of heterogeneity in donor behavior. Thanks to the width of this dataset, I can test differences of parameters among donors and, in particular, compare their degrees of altruism. Switzerland, Austria, Ireland and most Nordic countries are among the most altruistic. Australia, France, Italy, and to some extent Japan and the United States are among the most egoistic. Copyright © 2006 The Author; Journal compilation © 2006 Blackwell Publishing Ltd.
Critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies. Supporters argue that foreign aid can be used to reward good governments. This paper documents that there is no evidence that less corrupt governments receive more foreign aid. On the contrary, according to some measures of corruption, more corrupt governments receive more aid. Also, we could not find any evidence that an increase in foreign aid reduces corruption. In summary, the answer to the question posed in the title is 'no.'
We exploit differences in European mortality rates to estimate the effect of institutions on economic performance. Europeans adopted very different colonization policies in different colonies, with different associated institutions. In places where Europeans faced high mortality rates, they could not settle and were more likely to set up extractive institutions. These institutions persisted to the present. Exploiting differences in European mortality rates as an instrument for current institutions, we estimate large effects of institutions on income per capita. Once the effect of institutions is controlled for, countries in Africa or those closer to the equator do not have lower incomes.