Foreign aid and the quality of economic institutions

Identification of the causal effect that foreign aid has on the quality of institutions in recipient countries has been elusive in the aid effectiveness literature. The main reason is that aid is endogenous with respect to the development of institutions. Our paper examines the impact of foreign aid on economic freedom in the recipient countries at a disaggregated level using an innovative identifying strategy. To do so, we use recently innovated instruments for aid, exploiting the long lags between loan approval and disbursements by official creditors to developing countries. Using plausibly exogenous variations in predicted loan disbursements as instruments for actual aid, we find that foreign aid has a significant positive effect on the quality of economic institutions in recipient countries. The results are robust to alternative specifications and samples. By establishing the existence of a strong link between aid and the quality of economic institutions, we identify the main channel through which aid affects economic growth and development.     

Institutions,Lobbying, and Economic Performance

We investigate whether the impact of institutions depends not just on their current state but also on how they came to be. In particular, we hypothesize that while economic freedom that emerges spontaneously may be growth promoting, economic freedom that emerges as a result of costly lobbying efforts may be less fruitful. In an extreme case, costly lobbying efforts may even negate the growth‐enhancing effect of economic freedom. To the extent that lobbying efforts constitute an opportunity cost of resources diverted away from investment and production, our hypothesis also implies that greater the opportunity cost of lobbying, the more efficient is the institutional environment. Panel data analysis reveals the expected positive relation between economic freedom and growth, and consistent with our hypothesis, the findings indicate that the impact of economic freedom on growth does indeed diminish as lobbying efforts increase. In addition, we find that lobbying is more harmful to growth at greater levels of economic freedom.     

Economic Freedom and the Quality of Life: An Empirical Analysis

Previous empirical research on the social and economic impact of freedom has tended to focus on the link between freedom and economic growth rates. Only a few studies have looked at freedom's effect on the quality of life, and these generally focused on the effect of political freedom. Here, we attempt to bridge this gap by analyzing the effect of economic freedom on the quality of life. Taking advantage of newly developed measures of economic freedom, we analyze the impact of economic freedom on life expectancy and literacy rates. We find that greater economic freedom enhances the quality of life both across nations and increases the improvements in the quality of life over time.     

Natural Resources,Institutional Quality,and Economic Growth in China

The resource curse has been mainly studied using cross-country samples. In this paper we analyze a cross-province sample from one country: China. We focus on the interplay between resource abundance, institutional quality, and economic growth, using two different measures of resource abundance (a stock: resource reserves; and a flow: resource revenues), and employing various econometric approaches including varying coefficient models. We find that resource abundance has a positive effect on economic growth at the provincial level in China between 1990 and 2008, an effect that depends nonlinearly on institutional quality (1995 confidence in courts). The ‘West China Development Drive’ policy, initiated in 2000, caused substantial changes, which we investigate through a comparative panel-data analysis.     

Aid, policy and growth in post-conflict societies

Countries emerging from civil war attract both aid and policy advice. This paper provides the first systematic empirical analysis of aid and policy reform in the post-conflict growth process. It is based on a comprehensive data set of large civil wars, and covers 17 societies that were in their first decade of post-conflict economic recovery. We first investigate whether the absorptive capacity for aid is systematically different in post-conflict countries. We find that during the first 3 post-conflict years absorptive capacity is no greater than normal, but that in the rest of the first decade it is approximately double its normal level. Thus, ideally, aid should phase in during the decade. Historically, aid has not, on average, been higher in post-conflict societies, and indeed it has tended to taper out over the course of the decade. We then investigate whether the contribution of policy to growth is systematically different in post-conflict countries, and in particular, whether particular components of policy are differentially important. For this we use the World Bank policy rating database. We find that growth is more sensitive to policy in post-conflict societies. Comparing the efficacy of different policies, we find that social policies are differentially important relative to macroeconomic policies. However, historically, this does not appear to have been how policy reform has been prioritized in post-conflict societies.     

FOREIGN AID,TERRORISM AND GROWTH: CONDITIONAL EVIDENCE FROM QUANTILE REGRESSION

In this study, we investigate the role of development assistance in reducing a hypothetically negative impact of terrorism on economic growth, using a panel of 78 developing nations with data for the period 1984–2008. The empirical evidence is based on interactive quantile regressions. Domestic, transnational, unclear and total terrorism dynamics are employed while development assistance measurements comprised bilateral and multilateral aid variables. With regard to the investigated hypothesis, we consistently confirm that: (i) In quantiles where terrorism is found to increase (decrease) economic growth, its interaction with foreign aid decreases (increases) economic growth. (ii) Comparing thresholds of the modifying aid variables for which the hypothesis is either rejected or accepted reveals that higher levels of multilateral (bilateral) aid are needed to reverse the negative effect of total (unclear) terrorism on growth, than the quantity needed to reverse the positive impact of transnational (domestic and total) terrorism(s) on growth. (iii) There is scant evidence of positive net effects. Overall the findings broadly indicate that foreign aid is a necessary but not a sufficient policy tool for completely dampening the effects of terrorism on economic growth.     

Do remittances and foreign aid augment the gross savings: Bangladesh,India and Philippines perspective?

Savings is considered to be a principal determinant to achieve long-run economic growth. Remittances and foreign aid are two important foreign capital inflows to meet the savings deficiency of developing nations. The objective of this study is to investigate the long-run impact of remittance to stimulate savings in remittance recipient countries. This paper contributes to the macroeconomic impact of remittance through a comparative study on Bangladesh, India and Philippines that positioned among the top ten largest remittance recipient countries from 2008 and onwards. The analysis makes use of an annual time series data over the period of 1980–2015. The Johansen cointegration test suggested long-run cointegrating relationship of remittance and foreign aid on gross savings. The test result suggests positive effect of remittances on gross savings for Bangladesh and Philippines although an insignificant negative effect for India. However, foreign aid has significant negative long-run impact in all the three cases. Government policy should focus on leveraging remittance flows to facilitate savings and investment for capital accumulation.     

Foreign aid,institutional quality and economic growth: Evidence from the developing world

This paper examines the effect of sectoral foreign aid and institutional quality on the economic growth of 74 developing countries from Africa, Asia and South America, and covers the period 1980–2016. We consider bilateral aid flows into three sectors, namely education, health and agriculture, and find that among the three types of aid, education aid is more effective for aid-receiving countries. The effect is conditional on the current level of institutional quality and varies substantially across regions. While education aid is more effective in South America, health aid is more effective in Asia and agricultural aid is more effective in Africa. As the level of institutional quality improves, the gap between the marginal effect of education, health and agricultural aids widen. Our findings have strong policy implication for donor countries and international aid organisations, which shows that it is more desirable to shift aid flows towards the education sector as the level of institutional quality improves.     

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.     

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.     

Resource Curse: New Evidence on the Role of Institutions

This paper attempts to provide a probable answer to a longstanding resource curse puzzle; i.e., why resource-rich nations grow at a slower rate compared with less fortunate ones. Using an innovative threshold estimation technique, the empirical results reveal that there is a threshold effect in the natural resources–economic growth relationship. We find that the impact of natural resources is meaningful to economic growth only after a certain threshold point of institutional quality has been attained. The results also shed light on the fact that the nations that have low institutional quality depend heavily on natural resources while countries with high quality institutions are relatively less dependent on natural resources to generate growth.     

The impact of the Interaction between institutional quality and aid volatility on growth: theory and evidence

We analyze both theoretically and empirically, the effect of aid volatility and its interaction effect with institutional quality on per capita economic growth. Our theoretical model, in which an aid-recipient government, operating in an institutional environment of some given quality (making choices over the distribution of aid), predicts that a negative effect of aid volatility on growth is mitigated by stronger institutional quality. We use panel data covering the period 1984–2004 for 78 countries to test this theoretical prediction. Using Generalised Methods of Moments (GMM) we find the relationship between growth and aid volatility is significantly negative and depends on institutional quality. Our baseline results are robust to various computations of aid volatility and foreign aid, time periods, sub-samples and additional covariates.     

ECONOMIC FREEDOM VERSUS POLITICAL FREEDOM: CROSS‐COUNTRY INFLUENCES ON CORRUPTION*

Using a well‐known index of corruption, this paper examines the determinants of corruption for a large sample of countries. Specifically, the present study brings empirical evidence to bear on the question of whether economic freedom or political freedom serves as a deterrent to corrupt activity. In particular, does greater economic freedom or greater political freedom yield a more ‘clean’ society? Our results show that greater economic freedom seems to matter more in this regard. Examining different components of economic freedom, we find that not all these components are equally effective in reducing corruption. For instance, monetary policy seems to have a stronger influence on the level of corrupt activity in a country than fiscal policy. Robustness of these findings is checked and policy implications are discussed.     

Aid, Growth and Democracy

To the extent that aid is justified by the benefits to the recipient, rather than to the donor, it might be reasonably judged on two criteria: growth and poverty-alleviation. We study the first of these criteria. We find that the long-run growth impact of aid is conditional on the degree of political and civil liberties in the recipient country. Aid has a positive impact on growth in countries with an institutionalized check on governmental power; that is, in more democratic countries. The data suggest, however, that if this is not the case, aid will be used to satisfy the government's own non-productive goals. We also find that aid on average is not channeled to more democratic countries, even though there are large cross-country differences between major donors.     

Lessons from the experience of OECD nations on macroeconomic growth and economic freedom, 2004–2008

This study empirically investigates the impact on per capita real economic growth of each of the ten measures of economic freedom computed annually by the Heritage Foundation. Within the context of the Random Effects Model, panel least squares estimations using a 5-year panel (2004 through 2008) dataset for the OECD nations as a group reveal that the percentage growth rate in the purchasing-power-parity adjusted per capita real GDP for OECD nations was, at the 5?% statistical significance level or better, an increasing function of at least seven of the ten economic freedom measures. The results underscore the critical role that economic freedom plays in a nation??s economic growth and prosperity and the importance of pursuing policies that are consistent with increasing economic freedom.     

Knowledge investments, business R&D and innovativeness of countries: A qualitative meta-analytic comparison

The relationship between knowledge investments, innovation and competitiveness is an important topic in both academic research and economic policy and has been studied extensively over the past decades. Nowadays, investments in private and public R&D are believed to make up the heart of a modern knowledge economy. The present paper adopts an evolutionary economics perspective and investigates whether, in addition to private R&D activities, also institutional support systems and policy interventions play a role in inducing innovation initiatives and creating impacts on the performance and competitiveness of industries. We aim to find support for the hypothesis that the competitiveness of industries in the international arena is sustained by the dynamic interaction between national, regional and sectoral innovation systems. This may provide stakeholders with a better understanding of the context in which they operate. Since according to the evolutionary metaphor, the growth of an innovation system follows complex dynamics that cannot simply be analysed within a static quantitative equilibrium framework, we use here an alternative approach based on qualitative pattern recognition analysis originating from artificial intelligence analysis. Besides R&D expenditures, human capital expenditures are regarded as the major input in the knowledge creation process in our analytical framework. To this end, in our paper a qualitative causal model that maps out conditional relations between key factors in national innovation systems will be described. The focus of our investigation is on systematic patterns in the competitiveness of the EU Member States, using statistical information on innovation input and output data from the European Innovation Scoreboard. In our analysis we find support for the hypothesis that there are indeed significant interactions between distinct institutional levels, which may provide guidance to the strategic orientation of nations and the European Union in terms of the emphasis on competitiveness vis-à-vis cohesion.     

Core Concepts of Institutionalist Public Finance: Problem Solving,Institutional Analysis,Strategic Choice,and Stakeholder Engagement

Citizens and policymakers in many nations are becoming increasingly concerned about large budget deficits and mounting long-term fiscal policy challenges. At the same time, slow economic growth in the United States and Europe is causing some people to demand more government spending (and lower taxes) and others to question the efficacy of fiscal policy. Against that backdrop, institutional economists are exhibiting renewed interest in the field of public finance. This article responds by outlining four core concepts of institutionalist public finance: problem solving, institutional analysis, strategic choice, and stakeholder engagement. What distinguishes the perspective of institutionalism from that of neoclassical economics, today’s dominant economic paradigm, is described in the course of the discussion. The core concepts of institutionalist public finance offer a coherent approach to the study of fiscal policy questions. Those concepts were first fashioned decades ago, but remain relevant: institutionalism continues to provide a solid basis for constructive analyses of fiscal challenges.     

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.     

Who benefits from financial development? New methods,new evidence

This paper takes a fresh look at the impact of financial development on economic growth by using recently developed kernel methods that allow for heterogeneity in partial effects, nonlinearities and endogenous regressors. Our results suggest that while the positive impact of financial development on growth has increased over time, it is also highly nonlinear with more developed nations benefiting while low-income countries do not benefit at all. We also conduct a novel policy analysis that confirms these statistical findings. In sum, this set of results contributes to the ongoing policy debate as to whether low-income nations should scale up financial reforms.     

Bankruptcy costs,economic policy uncertainty,and FDI entry and exit

In this paper, we examine how the effect of economic policy uncertainty on foreign direct investment (FDI) entry and exit varies with the cost of bankruptcy resolution. Using a sample of bilateral FDI entry and exit for 23 countries and areas from 2004 to 2012, we find that an increase in bankruptcy costs in a country exacerbates the dampening effect of economic policy uncertainty on both FDI entry and exit. Subsample analysis reveals that the bankruptcy resolution channel only exists in high political risk countries. We also find that the bankruptcy resolution channel does not exist for foreign portfolio investment, which is consistent with real option theory. Broadly put, our contribution is at the nexus of institutional theory and FDI, as we identify the bankruptcy resolution channel through which economic policy uncertainty affects FDI entry and exit.