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Foreign aid, economic globalization, and pollution

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Abstract

This paper explores how trade and foreign direct investment (FDI) condition the effect of foreign aid on environmental protection in aid-recipient countries. We suggest that (1) environmental protection should be viewed as a public good and (2) all else equal, resource flows from abroad (via aid, trade, and FDI) influence governments' incentives to provide public goods. (3) Because these resources shape governments' incentives differently , their interactive effects should be examined. We begin with the assumption that developing country governments seek some optimal level of environmental protection, a level conditioned by their factor-intensive growth phase. We hypothesize that at low levels of export receipts or FDI inflows from the developed world, foreign aid is associated with superior environmental protection. This is because foreign aid, as an environmentally neutral addition to revenue, allows recipient governments to partially relax the trade-off between economic growth and environmental protection. As levels of export receipts or FDI inflows from the developed world increase, however, the salutary effect of foreign aid will diminish and eventually be reversed. This is because foreign aid mitigates the recipient government's dependence on traders and investors in the developed world, and concom-itantly reduces their pro-environmental policy leverage. Our analysis of 88 aid recipients, for the period 1980–2005, lends support to our argument.

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This article examines the relationship between foreign direct investment and host countries’ contracting institutions, the rule systems which govern commercial transactions between private actors. Given their liability of foreignness and costly exit options, we suggest that multinational corporations have incentives to influence the formal contracting environment in host countries. Further, host governments are more likely to respond to multinationals’ wishes when they are more dependent on foreign capital markets. We draw on the World Bank’s Lex Mundi dataset (Djankov et al. 2003) on micro-level contracting environment for private actors. Our analysis of a cross section of 98 developing countries suggests that FDI is associated with lower contract enforcement costs, particularly when the host country is more indebted. KeywordsContract enforcement-Foreign investment-Globalization
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We empirically test existing theories on the provision of public goods, in particular air quality, using data on sulfur dioxide (SO2) concentrations from the Global Environment Monitoring Projects for 107 cities in 42 countries from 1971 to 1996. The results are as follows: First, we provide additional support for the claim that the degree of democracy has an independent positive effect on air quality. Second, we find that among democracies, presidential systems are more conducive to air quality than parliamentary ones. Third, in testing competing claims about the effect of interest groups on public goods provision in democracies we establish that labor union strength contributes to lower environmental quality, whereas the strength of green parties has the opposite effect.
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In the early 1990s, donor countries tied approximately 50% of their foreign aid to exports. The export stimulation of aid may have exceeded the amount that is directly tied. This paper uses the gravity model of trade to statistically test the link between aid and export expansion. The results suggest that aid is associated with an increase in exports of goods amounting to 133% of the aid. The paper also makes comparisons among donors and finds that Japan, which has drawn harsh criticism for using aid to gain unfair trade advantages, derives no more merchandise exports from aid than the average donor.
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In an infinite-horizon stochastic model, a coup not only disciplines a dictator's policy towards a group of “kingmakers”, but also enables a kingmaker to become a dictator. Greater competition for the dictator's position, a lower impact of the dictator's policy on the kingmakers, or lower risks of staging a coup raises the benefit of a coup relative to its opportunity cost and so raises the probability of a coup. Since periodic shocks affect the efficacy of the dictator's policy, a bad enough shock makes it too costly for even talented dictators to avert a coup. More talented dictators are able to survive more negative shocks, so the worst shock in a dictator's reign is informative about the probability of a coup. Conditional on the worst shock, the probability of a coup is independent of a dictator's duration in office. The unconditional probability declines with duration.
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This paper presents evidence on whether multinationals are flocking to developing country “pollution havens”. Although we find some evidence that foreign investors locate in sectors with high levels of air pollution, the evidence is weak at best. We then examine whether foreign firms pollute less than their peers. We find that foreign plants are significantly more energy efficient and use cleaner types of energy. We conclude with an analysis of U.S. outbound investment. Although the pattern of U.S. foreign investment is skewed towards industries with high costs of pollution abatement, the results are not robust across specifications.
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Many developing-country governments rely heavily on trade tax revenue. Therefore, trade liberalization can be a potential source of significant fiscal instability and may affect government spending on development activities-at least in the short run. This article investigates whether donors use aid to compensate recipient nations for lost trade revenue or perhaps to reward them for moving toward freer trade regimes. The authors do not find empirical evidence supporting such motives. This is of some concern because binding government revenue constraints may hinder development prospects of some poorer nations. The authors use fixed effects to control for the usual political, strategic, and other considerations for aid allocations.
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This research note examines whether trade competition abets regulatory races in the environmental area. To analyze trade competition, we develop a new measure, structural equivalence, which assesses competitive threats that a country faces from other countries whose firms export the same products to the same destination countries. Employing this new measure, we analyze air pollution intensity (sulfur dioxide or SO2) and water pollution intensity (biochemical oxygen demand or BOD) for a panel of 140 countries for the time period 1980 2003. We find that trade competition is a significant predictor of water pollution intensity among structurally equivalent countries. We then test separately whether trade competition abets upward and downward regulatory races. We find that in the case of water pollution, countries respond symmetrically to downward and upward races, that is, they follow their structurally equivalent competitor countries both when they ratchet down their regulations and when they ratchet up regulations. In the case of air pollution, however, countries are responsive to downward policy changes only in competitor countries.
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The notable increases in funding from various donors for health over the past several years have made examining the effectiveness of aid all the more important. We examine the extent to which donor funding for health substitutes for--rather than complements--health financing by recipient governments. We find evidence of a strong substitution effect. The proportionate decrease in government spending associated with an increase in donor funding is largest in low-income countries. The results suggest that aid needs to be structured in a way that better aligns donors' and recipient governments' incentives, using innovative approaches such as performance-based aid financing.
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Many panel data sets encountered in macroeconomics, international economics, regional science, and finance are characterized by cross-sectional or "spatial" dependence. Standard techniques that fail to account for this dependence will result in inconsistently estimated standard errors. In this paper we present conditions under which a simple extension of common nonparametric covariance matrix estimation techniques yields standard error estimates that are robust to very general forms of spatial and temporal dependence as the time dimension becomes large. We illustrate the relevance of this approach using Monte Carlo simulations and a number of empirical examples. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technolog