What Determines Bilateral Aid Allocations? Evidence From Time Series Data

This paper models the allocation of bilateral foreign development aid to developing countries. A simple theoretical framework is developed, in which aid is treated as a private good of a donor country bureaucratic group responsible for bilateral aid allocation. This model is applied to time series data for ten principal recipients of bilateral official development assistance. Features of this application are that it caters for the joint determination of aid allocations and for donor allocation behavior to differ among individual recipient countries. Results indicate that both recipient need and donor interest variables determine the amount of foreign aid to developing countries, and that donor allocation behavior often differs markedly among recipients.     

Multiple equilibria arising from donor’s aid policy in economic development

This paper presents a neoclassical growth model comprising education and child labor with a focus on developing and aid-receiving countries to demonstrate cyclical growth and bifurcation in economic development. The appearance of multiple equilibria has often been attributed to the internal affairs of recipient countries, such as technology in production, subsistence minimum in consumption, and liquidity constraints in investment. The main argument of this paper is that the aid allocation policy employed by donor countries, thereby the motive of aid-providers, leads to divaricated and cyclical development in the recipient countries.     

Aid effectiveness and limited enforceable conditionality

This paper analyzes optimal foreign aid policy in a neoclassical growth framework with a conflict of interest between the donor and the recipient government. Aid conditionality is modeled as a limited enforceable dynamic contract. We define the contract to be self-enforcing if, at any point in time, the conditions imposed on aid funds are supportable by the threat of a permanent aid cutoff from then onward. Quantitative results show that optimal self-enforcing conditional aid strongly stimulates the developing economy and substantially increases welfare. However, aid effectiveness comes at a high cost: to ensure enforceability, less benevolent political regimes receive permanently larger aid funds in return for a less intense conditionality.     

Darlings and Orphans: Interactions across Donors in International Aid

We examine how the bilateral aid flows from an individual donor to a recipient depend on the aid flows from all other bilateral and multilateral donors to that recipient. Thereby, we assess to what extent issues including donor coordination, free‐riding, selectivity, specialization, and common donor interests drive bilateral aid allocations. We find that others’ bilateral flows lead to a significant increase in aid flows from a particular donor, but primarily within a given year. The effects are particularly pronounced for large donors and so‐called “darling” recipients. Overall, the results suggest that herding is a dominant feature of aid inter‐relationships.     

Welfare effects of tied food aid

An important part of the overall U.S. aid program is Public Law 480 food aid. The design of the program seeks to satisfy numerous and often conflicting objectives. Several constraints have been placed on the use by recipient countries of that aid to insure that the intentions of the program are achieved. This paper examines the implications for recipient country welfare of both the traditional and the proposed restrictions on PL480 aid. It also seeks to clarify the interpretation of empirical work on the effects of this aid. It is shown that the net value of such commodity tied aid is simply the grant component of the subsidized sale and may easily be realized by substituting food aid imports for commercial imports. Restrictions which prevent aid recipients from doing so are costly to the recipient and could lead even to immuserization. Empirical evidence obtained by others is consistent with the notion that such restrictions are circumvented, where possible, by food aid recipients. The results presented indicate that a ‘Schultzian’ disincentive effect is characteristic of a closed economy. Typical interventions on the part of recipient country governments do not effectively reclose the economy. Hence, open economy models are more appropriate frameworks for evaluating the effects of PL480 aid.     

Your development or mine? Effects of donor–recipient cultural differences on the aid-growth nexus

Development aid from the West may lead to adverse growth effects in the global South due to the neglected cultural differences between development aid (paradigm) providers and recipients. I test this hypothesis empirically by augmenting an aid-growth model with proxy variables for cultural differences between donors and recipients. First, I use donor–recipient genetic distance, i.e., blood types, to capture the traditional way of cultural transmission. Second, I use western education of recipient country leaders to capture resource-based transmission of culture. Results of the OLS panel estimation in first differences show that a one unit increase in donor–recipient genetic distance reduces the main effect of aid on growth by 0.2 percentage points when aid is increased by one percentage point. In turn, a one percentage point increase in aid yields on average a 0.3 percentage point increase in growth after a decade for countries with western educated leaders.     

CONDITIONING AID ON SOCIAL EXPENDITURES

Aid conditionality forces countries to adopt policies that they would not otherwise choose. We examine how government discretion should be so constrained when the donor cannot fully control public expenditures, but instead can influence a less disaggregated indicator of public policy, namely the allocation of public spending between the social sectors (e.g. education, health, etc.) on the one hand and more traditional public goods (e.g. infrastructure) on the other. We first show how budget allocations will be altered when recipient government preferences are known – i.e. we characterize what policies the donor should "buy"– and how a given aid budget should be allocated between different types of countries. When recipient government preferences are not known by the donor, the permitted policies are distorted due to incentive constraints, and the extent to which aid flows are optimally differentiated between different countries is reduced.     

On Ramsey's conjecture: efficient allocations in the neoclassical growth model with private information

In his seminal paper of 1928, Ramsey conjectured that if agents discounted the future differently, in the long run all agents except the most patient would live at the subsistence level. The validity of this conjecture was investigated in different environments. In particular, it has been confirmed in the neoclassical growth model with dynamically complete markets. This paper studies this conjecture in a version of this model that includes private information and heterogeneous agents. A version of Bayesian implementation is introduced and a recursive formulation of the original allocation problem is established. Efficient allocations are renegotiation-proof and the expected utility of any agent cannot go to zero with positive probability if the economy does not collapse. If the economy collapses all agents will get zero consumption forever. Thus, including any degree of private information in the neoclassical growth model will deny Ramsey's conjecture, if efficient allocations are considered.     

Are Aid Flows Excessive or Insufficient? Estimating the Growth Impact of Aid in Threshold Regressions

Existing empirical studies and policy reports provide ambiguous results on the growth effect of foreign aid flows in the recipient countries. The present paper examines whether there exists an aid threshold that determines the growth impact of foreign aid. We use a threshold regression methodology to estimate growth specifications and the associated aid thresholds in a sample of 42 aid recipients covering the period 1970–2000. Our findings indicate that there is a threshold level of aid, above which the growth impact of aid becomes positive.     

Samaritan agents? On the strategic delegation of aid policy

Should a donor delegate the responsibility for allocating its aid budget to a less inequality-averse agent to alleviate the consequences of the Samaritan's Dilemma it is facing? I show that when aid impact differs across recipients the optimal type of agent depends on whether or not committing to a greater share for countries where the productivity of aid is low raises the combined domestic incomes of recipients. This is the case for donors too concerned with efficiency ex post. They therefore delegate the decision on the discretionary aid allocation rule to agents more sensitive to distributional issues than themselves.     

Donor–recipient ideological differences and economic aid

We explore the impact of donor–recipient ideological differences on US economic aid decisions. We find that the odds and the amount of aid to left-wing recipients are higher under left-wing US administrations. The opposite result is found for center-right recipients.     

Equal opportunity and poverty reduction: How should aid be allocated?

This paper analyzes a model of aid allocation equalizing the opportunity between recipient countries to reach a common poverty reduction goal. We propose a fair and efficient aid allocation based on a multicriteria principle. The model considers structural handicaps in recipient countries in terms of lack of human capital and economic vulnerability, their initial poverty, and the natural gap between the growth rate required to reach a development goal and the observed one. We show that our proposed aid allocation favors poor and vulnerable countries with our multicriteria principle. It substantially differs from the observed allocation. Analyses also shed light on the impact of the donors' aversion to the low natural growth gap in recipient countries on the optimal aid allocation and the marginal efficiency of aid.     

On the Non-Contractual Nature of Donor–Recipient Interaction in Development Assistance

The author analyzes three issues in strategic donor–recipient interaction motivated by the complexity of the rationale underlying aid. The first is when we have several principals with conflicting objectives. Any one principal cannot offer high powered incentives to the agent to carry out his or her designated task. The second is to do with the fact that effort associated with ensuring aid effectiveness may concern both principal and agent, the optimal solution to which requires cooperative behavior that is difficult to design. Consequently, the contractual type principal–agent relationship between donors and recipients is inappropriate. We need to consider models that signal recipient quality or commitment to reform. Thus, thirdly, a simple model of signaling with commitment problems is presented, along with extensions to multiple types of agent and time periods, as well as possible solutions involving mechanism design.     

DEMOCRATIC AID AND THE DEMOCRATIZATION OF RECIPIENTS

We investigate whether democratic aid flows, which are directed toward the democratization of recipients by covering democracy‐related programs and government and civil society activities, affect the future political regime of recipient countries. We introduce a multinomial multivariate logit model and we use 5‐yr averaged data covering the period 1972–2004 for 59 democracy aid‐recipient countries categorized into three broad classes according to the prevalent political regime. We find strong evidence that democratic aid flows are positively associated with the likelihood of observing a partly democratic or a fully democratic political regime in democratic aid‐recipient countries and that this result is robust to the potential endogeneity of democratic assistance.(JEL D70, F35, C25)     

When does more aid imply less democracy? An empirical examination

Foreign aid flows have increased considerably during the last decades, targeting, apart from development objectives, goals related to democracy. In this paper we investigate whether aid has affected the political regime of recipient countries. To this end, we use annual data on Net Official Development Assistance covering 64 aid-recipients. Because of data limitations, we cover the 1967-2002 period. We find that aid flows decreased the likelihood of observing a democratic regime in a recipient country. This effect is sensitive to economic and social conditions. The negative relation between aid and democracy is moderated when aid flows are preceded by economic liberalization. Aid from the U.S. has a non-significant effect on the political regime of recipients.     

Rethinking the aid–growth relationship: A network approach

Over 40 years of conventional economic analysis has not reached consensus on the effect of foreign aid on recipient country growth. We provide new insight into this relationship by using a network approach to characterize the topological properties of the Organization for Economic Co‐operation and Development (OECD) foreign aid network. Viewing the OECD foreign aid community as an interdependent and complex system, we characterize not only the amount of aid but also the position of both donor and recipient within the network. We find that the degree centrality of the recipient, with an edge inclusion threshold that sets a minimum share of a donor’s aid to a particular recipient, is significantly correlated with the growth impact of that donor’s aid. Contrarily, aid is uncorrelated with growth with a recipient‐side filter on the importance of the donor to the recipient. These results suggest that the importance of a recipient within the donor’s network, rather than the volume of aid alone, is associated with the growth impact of bilateral aid. We explore mechanisms for these findings that include the complementarity of aid from multiple attentive donors. Our findings speak to the aid–growth puzzle and suggest that network metrics may illuminate non‐obvious channels of aid impact.     

Why equity cannot be separated from efficiency: the welfare economics of progressive social pricing

Applied neoclassical microeconomists maintain that when profits are constrained, and average costs are higher than marginal costs, Ramsey “inverse elasticity” pricing optimizes static consumer welfare. However, when weighted, instead of unweighted, consumer surplus aggregation is used, the Ramsey pricing rule becomes a “progressive social pricing rule,” which suggests that under plausible conditions “direct-elasticity” rather than “inverse-elasticity” pricing is consumer welfare optimal.     

Shortcuts and Signals: An Analysis of the Micro-level Determinants of Aid Allocation, with Case Study Evidence from Brazil

Does the distribution of foreign development assistance depend on the organizational capacity of the recipient organization? I argue that employees at donor agencies seek signals of which recipients will implement aid most effectively, and use these signals to determine the destination of foreign aid on the micro level. Qualitative evidence gathered in the US and Brazil indicates the types of signals donors seek and recipients strive to transmit: signals of a recipient's professionalism, reputation, and sustainability. After developing a signaling game to derive the conditions under which these signals might be credible indicators of implementation effectiveness, I present quantitative evidence of aid recipient organizations in Brazil and score them on the three signals. Statistical tests confirm that organizations with higher levels of these signals are more likely to receive funding, suggesting that donors use these signals to determine the destination of development assistance.     

Aid-growth nexus: empirical evidence from Fiji

Foreign aid to the island economies is a major source for foreign exchange and resource needs. This paper presents an empirical analysis of the relationship between foreign aid and economic growth in the case of Fiji. A neoclassical production function is applied to estimate the aid-growth nexus. Since the data employed are time series for the period 1968 to 1996, the Autoregressive Distributed Lag approach to cointegration is utilized to estimate the models. Components of total aid, such as grant aid, loan aid, technical cooperation, bilateral and multilateral aid flows are also utilized to estimate a disaggregated short-run and long-run relationship between foreign aid and economic growth. The results show that total aid flows and its various forms, i.e. bilateral aid, grant aid and technical cooperation grant aid, has a significant impact on economic growth in Fiji. As for domestic resources, only exports and private investments in two equations show positive contribution to growth.     

Social Security, Optimality, and Equilibria in a Stochastic Overlapping Generations Economy

Social security institutions implement intergenerational transfers and distribute risks over time. To compare various social security designs, we study an overlapping generations model with demographic shocks. Production takes place through a neoclassical production function subject to productivity shocks. We give a near characterization of optimal allocations. We study rational expectations equilibria when contributions are mandatory, based on labor and capital income. We also describe the equilibria of an economy with a voluntary pay-as-you-go social security fund, and show that they have a long-run optimality property. An example with Cobb–Douglas production and utility functions illustrates the results.