Aid for Trade and Global Growth

Aid for trade increases a recipient's public services, which lower its import and export transport costs. Formulating a two‐country endogenous growth model, we obtain two main results. First, a permanent increase in the donor's aid/gross domestic product (GDP) ratio raises the steady‐state growth rate as well as both countries' long‐run fractions and cost shares of imported varieties if and only if it lowers the product of transport costs. Second, under a plausible condition, there exists a unique interior growth‐maximizing aid/GDP ratio. These results are robust to alternative specifications for congestion and stock‐flow nature of public goods.     

Aid,non‐traded goods,and growth

Abstract We examine the effects of foreign aid in a small recipient country with two traded goods, one non‐traded good, and two factors. Learning by doing and intersectoral knowledge spillovers contribute to endogenous growth. We obtain two main results. First, a permanent increase in untied aid raises (or lowers) the growth rate if and only if the non‐traded good is more capital intensive (or effective labour intensive) than the operating traded good. Second, a permanent increase in untied aid raises welfare if the non‐traded good is more capital intensive than the operating traded good; otherwise, it may raise or lower welfare.     

Pareto-improving Untied Aid with Environmental Externalities

This paper shows that even untied aid is Pareto-improving if and only if the marginal propensity to consume the polluting good in the donor country is sufficiently larger than in the recipient country.     

Good governance and good aid allocation

We model the aid allocation process as a rent-seeking contest between two countries and investigate the effects of differing allocation rules on recipients' behavior in a simple framework. We investigate the aid allocation mechanism design that attempts to increase the governance quality of potential recipient countries: the potential recipients spend costly resources improving governance, while the donor country allocates the fund based on their governance quality. The paper compares two mechanisms: one uses a simple winner-takes-all tournament to award the entire available purse to the country with the best governance; while under the other aid is distributed among countries in proportion to their governance qualities. The paper shows the second mechanism outperforms the first only if competing countries are sufficiently asymmetric. Moreover, the recipient who is most effective in governance – and stands to benefit the most from development assistance – has interests opposite to those of the donor. In addition, the paper shows that if the donor country allocates the fund based on both governance and the levels of poverty, it may result in a poverty trap: the leaders of potential recipient countries deliberately allocate funds away from the poorest so as not to better their position in order to receive more aid.     

General budget support as an aid instrument—impact on economic growth

Since the change of the new millennium, general budget support (GBS) has become a prominent, yet controversial and heavily debated, modality for delivering aid. We study GBS as an aid instrument from a cross‐country perspective. We examine if any growth impacts can be identified as a result of the use of GBS. We use data covering nine 4‐year intervals from 1976 to 2011. We modify two supply‐side IV strategies from previous aid–growth literature. In our main approach, we employ an interaction of an exogenous supply‐side variable (donor government fractionalization) and an endogenous variable (probability of receiving GBS) as an instrument for GBS, and in the alternative approach we construct an instrument following a supply‐side approach. Our results suggest that GBS receiving countries have grown faster than countries receiving other types of aid. Selection bias does not explain this result. The growth effect is not only attributed to lagged GBS but also to contemporaneous GBS flows.     

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.     

Trade agreements, bargaining and economic growth

Rebelo’s two-sector endogenous growth model is embedded within a two-country international trade framework. The two countries bargain over a trade agreement that specifies: (i) the size of the foreign aid that the richer country gives to the poorer one; (ii) the terms of the international trade that takes place after the aid is given. Foreign aid is given not because of generosity, but because it improves the capital allocation across the world and thus raises total world production. This world production surplus enables the rich country to raise its equilibrium consumption and welfare beyond their no-aid levels. To ensure it, the rich country uses a trade agreement to condition the aid on favorable terms of trade.     

FDI,Foreign Aid,Remittance and Economic Growth in Developing Countries

Using a dynamic spatial framework, this paper investigates how foreign direct investment (FDI), foreign aid and remittances impact the economic growth of 53 African and 34 Latin American and Caribbean countries. Previous growth studies examine how one factor or two of these factors impacts economic growth, which results in biased estimation because of the omitted variable(s). Separate estimation shows foreign aid and FDI affects economic growth in Africa, but when we control for all three factors, only FDI affects African economic growth. For Latin America and the Caribbean, foreign aid and remittances affect growth when estimated separately, while remittances affect growth when they are estimated simultaneously. Finally, both regions' results confirm spatial interdependence is important in explaining economic growth, as growth in one country depends on the growth of its neighboring countries.     

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.     

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.     

A Theory of Voluntary Unrequited International Transfers

This paper proposes a theory of voluntary unrequited international transfers which explicitly allows for an international externality such that the well being of each country is influenced by the well being of other countries. Formulating a simple two–country and two–commodity model, this paper shows that (a) either neither country extends aid to the other, or one country extends aid and both countries benefit from the aid; and (b) there exist acceptable (Arrow–Debreu) economies such that neither country extends aid to the other, and there exist acceptable economies such that one country extends aid to the other.
JEL Classification Numbers: F11, F35.     

Migration,Foreign Aid and the Welfare State

Aspects related to the links between international migration, foreign aid and the welfare state are highlighted in this paper. Migration is modeled as a costly movement from an aid‐recipient developing country with low income and no welfare state, towards a rich donor, developed country with a well‐developed welfare state. Within this model, it is found, among other things, that the best response of the developed donor country is to increase aid as the co‐financing rate by the recipient country increases. When the immigration cost decreases, e.g. as a result of greater economic integration between the two countries, it is beneficial for the donor country to increase aid and the recipient country to increase the co‐financing rate.     

Lobbying by Ethnic Groups and Aid Allocation

We develop a political-economic model of foreign aid allocation. Each ethnic group in the donor country lobbies the government to allocate more aid to its country of origin, and the government accepts political contributions from lobby groups. Initial per-capita income of the recipients and those of the ethnic groups are shown to be important determinants of the solution of the political equilibrium. We also examine the effects of changes in the degree of corruption, aid fatigue, and ethnic composition, in the donor country on the allocation of aid.     

Fiscal position and the financing of productive government expenditures: an application to Latin America

Government spending on public infrastructure, education, and health care can increase economic growth. However, the appropriate financing depends on a country’s fiscal position. We develop a two-sector endogenous growth model to explore how variations in the composition and financing of government expenditures affect economic growth. We find that, when tax rates are moderate, funding public investment by raising taxes may increase long-run growth. If existing tax rates are high, public investment is only growth enhancing if funded by restructuring the composition of overall public spending. Additionally, public investment that is debt financed can have adverse effects on long-run growth due to the resulting increases in interest rates and debt-servicing costs.     

On the provision of official and private foreign aid

The provision of official relative to private foreign aid varies considerably between donor countries. We explain the variations in terms of country size, household composition, income distribution, and the government's ability to commit to aid, and derive inter alia the results: (1) official aid crowds out private aid, (2) total aid and official aid collected from each household are lower in more populous countries, (3) total aid is lower if (i) the distribution of income favors the more altruistic households, and (ii) the government can credibly commit to a certain level of aid. Evidences suggest that the theoretical results can explain stylized facts.     

Foreign aid and weakest-link international public goods: An experimental study

In this paper, we investigate efficiency differences between income and in-kind transfers as distribution mechanisms of foreign aid to weakest-link international public goods in a laboratory environment. We find that if there is relatively small difference in country size, then income transfers seem to provide a higher provision of the international public good, and thus higher overall welfare level than that of in-kind transfers. However, if there is a large disparity in country size, then in-kind transfers appear to provide a higher level of IPG provision and higher accompanying global welfare.     

Aid, Volatility, and Growth Again: When Aid Volatility Matters and When it Does Not

In previous papers the authors have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e. that aid is more effective in countries which are more vulnerable to external shocks). Recently an important debate has emerged about the possible negative effects of aid volatility itself. However, the cushioning effect of aid may involve some volatility in aid flows, which then is not necessarily negative for growth. In this paper the authors examine to what extent the time profile of aid disbursements may contribute to an increase or a decrease of aid effectiveness. They first show that aid, even if volatile, is not clearly as pro-cyclical as is often argued, and, even if pro-cyclical, is not necessarily destabilizing. They measure aid volatility by several methods and assess pro-cyclicality of aid with respect to exports, thus departing from previous literature, which usually assess pro-cyclicality of aid with respect to national income or fiscal receipts. The stabilizing/destabilizing nature of aid is measured by the difference in the volatility of exports and the volatility of the aid plus export flows. Then, in order to take into account the diversity of shocks to which aid can respond, they consider the effect of aid on income volatility and again find that aid is making growth more stable, while its volatility reduces this effect. They finally show through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to its stabilizing effect.     

Foreign Aid as Prize: Incentives for a Pro-Poor Policy

The authors develop a theoretical model of foreign aid to analyze a method of disbursement of aid which induces the recipient government to follow a more pro-poor policy than it otherwise would do. In their two-period model, aid is given in the second period and the volume of it depends on the level of well-being of the target group in the first period. They find that this way of designing aid does increase the welfare of the poor. They also consider the situations where the donor and the recipient governments act simultaneously as well as sequentially, and they find that, by moving first in a sequential game, the donor country can, under certain conditions, increase the welfare of the poor and that of its own country compared to the case of simultaneous moves.     

Free Trade and Economic Growth

This paper extends the Das (2005) model to set up an equilibrium growth model with heterogeneous labor to analyse the growth effects after trade openness. We prove that if the terms of trade large enough before opening trade, then it is more likely that opening trade would accelerate economic growth for a small open country, vice versa.     

The effect of aid on growth: evidence from a Quasi-experiment

The literature on aid and growth has not found a convincing instrumental variable to identify the causal effects of aid. This paper exploits an instrumental variable based on the fact that, since 1987, eligibility for aid from the International Development Association (IDA) has been based partly on whether or not a country is below a certain threshold of per capita income. The paper finds evidence that other donors tend to reinforce rather than compensate for reductions in IDA aid following threshold crossings. Overall, aid as a share of gross national income (GNI) drops about 59 % on average after countries cross the threshold. Focusing on the 35 countries that have crossed the income threshold from below between 1987 and 2010, a positive, statistically significant, and economically sizable effect of aid on growth is found. A 1 percentage point increase in the aid to GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points.