Bilateral Donors’ Interest vs. Recipients’ Development Motives in Aid Allocation: Do All Donors Behave the Same?

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.     

Motivation for bilateral aid allocation: Altruism or trade benefits

This paper argues that OECD countries allocate more aid to recipient nations who import goods in which donor nations have a comparative advantage in production. The estimates indicate that a substantially larger amount of aid is provided to recipients who import capital goods, while imports by other category groups have no significant effects. Given that developed donor nations are major producers and exporters of capital goods, this result at least partially supports their trade benefits motive. Donors also appear to be more concerned about alleviating physical miseries (infant mortality) and rewarding good human rights conditions, but less towards reducing economic hardships (poverty). Moreover, the usual political and strategic considerations of donors continue to be the major determinants of aid allocation even in the Post Cold War era.     

Partner country selection between development narratives and self-interests: A new method for analysing complex donor approaches

Partner country (PC) selection lies in the centre of development policy decision-making of donor countries and institutions, and plays a significant role in shaping aid patterns. This paper proposes a comprehensive analysis contrasting donor intentions in PC selection with actual aid flows. Having analysed selected members of the Development Assistance Committee of the Organization for Economic Cooperation and Development, namely, the European Union, France, Germany, Japan, Netherlands, Sweden, the United Kingdom and the United States of America, we suggest that (1) donors might not only be either altruistic or self-interested but also motivated by an intention to contribute to the provision of global public goods; (2) self-interest in aid provision can be an explicitly-stated strategy, contrary to what has been argued in the majority of the literature, which often treats self-interest as a non-stated donor intention; and (3) donors' self-interested intentions do not always lead to a less development-oriented donor approach.     

International aid and financial crises in donor countries

The recent global financial crisis placed new economic and fiscal pressures on donor countries that may have long-term effects on their ability and willingness to provide aid. Not only did donor-country incomes fall, but the cause of the drop — the banking and financial-sector crisis — may exacerbate the long-term effect on aid flows. 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 2010. We find that banking crises in donor countries are associated with a substantial additional fall in aid flows, beyond any income-related effects, at least in part because of the high fiscal costs of crisis and the debt hangover in the post-crisis periods. Aid flows from crisis-affected countries are estimated to fall by 28% or more (relative to the counterfactual) and to bottom out only about a decade after the banking crisis hits. In addition, our results confirm that donor-country incomes are robustly related to per-capita aid flows, with an elasticity of about 3. Findings are robust to estimation using either static or dynamic panel data methods to account for possible biases. Because many donor countries, which together provide two-thirds of aid, were hit hard by the global recession, this historical evidence indicates that aggregate aid could fall by a significant amount (again, relative to counterfactual) in the coming years. We also explore how crises affect different types of aid, such as social-sector and humanitarian aid, as well as whether strategic interaction among donors is likely to deepen or mitigate the fall in aid.     

Determinants of Canadian bilateral aid allocations: humanitarian,commercial or political?

Abstract.  In this paper we examine the determinants of the allocation of Canadian bilateral aid over the period 1984–2000. We draw on models of donor behaviour that allow us to incorporate humanitarian, commercial and political considerations – the 'trinity of mixed motives'– that affect Canadian aid. We find that allocations are moderately altruistic. Recipient country human rights and membership in the Commonwealth and La Francophonie also affect aid flows. Most strikingly, our results suggest that Canadian aid flows became less altruistic over this period and commercial motives became increasingly important. JEL Classification: H50, O10     

Foreign Aid and International Support as a Gift Exchange

Regressions on data from 1948 to 1979 indicate that the US and the Soviet Union used foreign aid to stimulate international political support from the receivers of aid and that aid receivers allocated their political support to stimulate aid from these donors. The regressions are based on a game theoretical model in which aid donors provide aid to reach foreign policy goals and in which aid receivers in return give political support to the donors so as to raise foreign aid. With foreign policy ambitions, aid should be given the countries with low GDP levels, while if altruistic considerations determine aid, countries with low levels of GDP per capita should be the beneficiaries. Since foreign aid to some extent was the result of cold war rivalry, the changes in international relations which occurred with the fall of the Soviet Union, should lower total foreign aid.     

Remittances and the Effectiveness of Foreign Aid

We argue that donors could improve the effectiveness of foreign aid by pursuing complementary and coherent non‐aid policies. In particular, we hypothesize that aid has stronger growth effects if recipients receive more aid from donors who allow for (temporary) worker mobility and (more permanent) migration. We focus on overall remittances paid by the donor countries to proxy for worker mobility and migration. Our empirical results support the hypothesis that higher remittances paid by donor countries strengthen the growth effects of foreign aid.     

Democracy,Geography and Model Uncertainty

We analyse the nature of robust determinants of differences in democracy levels across countries taking explicitly into account uncertainty in the choice of covariates and spatial spillovers. We make use of recent developments in Bayesian model averaging to assess the effect of a large number of potential factors affecting democratisation processes and account for several specifications of spatial linkages. Our results indicate that spatial spillovers are present in the data even after controlling for a large number of geographical covariates. Addressing the determinants of democracy without modelling such spillovers may lead to flawed inference about the nature of the determinants of democratisation processes. In particular, our results emphasise the role played by Muslim religion, population size, trade volumes, English language, natural resource rents, GDP per capita, being a MENA country and the incidence of armed conflicts as factors affecting democracy robustly.     

Employer matching and 401(k) saving: Evidence from the health and retirement study

Employer matching of employee 401(k) contributions is often touted as a powerful incentive to save for retirement and is a key component in pension-plan design in the United States. Using detailed administrative contribution, earnings, and pension-plan data from the Health and Retirement Study, this analysis formulates a life-cycle-consistent econometric specification of 401(k) saving and estimates the determinants of saving accounting for non-linearities in the household budget set induced by matching. The participation estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) participation by 5 percentage points. The parametric and semi-parametric estimates for saving indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) saving by $365 (in 1991 dollars). Overall, the analysis reveals that the 401(k) saving response to matching is quite inelastic, and, hence, matching is a rather poor policy instrument with which to raise retirement saving.     

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.     

AIDS and economic growth: A human capital approach

Using a model that combines growth and health capital equations this study analyses the impact of HIV/AIDS on economic growth. The econometric results indicate that the epidemic's effects have been substantial; in Africa the marginal impact on income per capita of a 1% increase in HIV prevalence rate is minus 0.59%. Even in countries with lower HIV prevalence rates the marginal impacts are non-trivial. Hence while the human and social costs of the HIV/AIDS epidemic are major causes for concern, these results indicate that the macroeconomic affects of the HIV/AIDS epidemic are important.     

The politics of special purpose trust funds

Over the last decades, bilateral donors of foreign aid have increased their use of special purpose trust funds to provide earmarked aid to multilateral organizations. This paper investigates the incentives and consequences underlying this recent shift toward country‐ or theme‐specific funding and away from bilateral and multilateral aid. We propose a game‐theoretic model with multiple principals and a multilateral agent to study how the interaction between donor preferences, voter concerns in the donor country, the voting rules at the multilateral organization, and the presence of special purpose trust funds influences aid allocation. We show that multilateral organizations with majority rules are more likely to receive discretion and thus voluntary core contributions than those with unanimity requirements and that the possibility of earmarking multilateral aid decreases donors’ contributions to the multilateral's discretionary core budget and the amount of bilateral aid. In contrast to much of the literature dealing with issues of delegation and bi‐ and multilateral aid, our model suggests non‐monotonic effects of preference heterogeneity on the choice of aid channel for some parameter combinations when contributions to special purpose trust funds are an option.     

Aid,institutions and economic growth in sub‐Saharan Africa: Heterogeneous donors and heterogeneous responses

This study contributes to the aid‐effectiveness debate using panel data from 43 sub‐Saharan African countries over the period 1980–2013. Its novelty lies in assessing the intermediary role of institutions and the importance of recipient and donor heterogeneity. The long‐run growth effect of (aggregate) aid from “traditional” donors is robustly non‐positive, and the indirect effect is negative. Disaggregation reveals donor heterogeneity. Chinese aid outperforms aggregate aid from traditional donors with respect to growth; however, it has a negative institutional effect. Recipient heterogeneity is largely a short‐run phenomenon, with only a few countries showing some deviations from shared long‐run parameter sets. Comparing donor behavior suggests that the future of aid would benefit more from focusing on quality – particularly, specialization and donor alignment.     

Statistical cost analysis: the hospital case

Cross-section estimates of 31 countries for the year 2000 are used to examine the effect of the level of female education, and the gap between male and female levels, on the prevalence of HIV/AIDS in Sub-Saharan Africa. Many standard types of education are analysed and a non-standard category involving under- and over-aged primary school enrollees are identified. Although it is found that female education is positively related to country infection rates, there is scope to reduce infection rates by substituting one type of education for another. It is estimated that female infection rates peak within 15–17 years of the first case reported.     

AIDS,longevity and long-run income

This article studies the long-run impact of HIV/AIDS on per capita income and education. We focus on the disincentive to human capital accumulation given by shorter life span. We work with a continuous time overlapping generations model with education and saving decisions, calibrated for a cross-section of countries. The simulations predict that the most affected countries in Sub-Saharan Africa will be in future, on average, 20% poorer than they would be without AIDS. Schooling will decline in some cases such as Botswana, South Africa and Zambia by more than 40%. The impact of population decline was found to be irrelevant.     

Aid, Agriculture and Poverty in Developing Countries

The authors make two contributions to the debate on aid‐effectiveness, illustrating that for impact on poverty what matters is not just the level but also the composition and stability of aid. One specific implication of this for aid policy is that aid most effectively reduces poverty if it supports public (and other) expenditures which are supportive of agricultural development. Regression analysis confirms that these are not only direct expenditure on agriculture, but also on education and infrastructure, and military expenditure has a negative impact. Three factors appear to be particularly conducive to the development of stable pro‐poor expenditure patterns (and in particular pro‐agriculture expenditure patterns). These are expenditure strategies which protect the poor against risk, the development of stable relations between governments and aid donors, and long‐term political commitment to pro‐poor strategies by government. The argument is pursued partly by panel‐data econometric analysis of developing countries as a whole, and partly by case studies of sustained and non‐sustained green revolutions in heavily aid‐dependent countries in Africa.     

Need,Merit, or Self‐Interest—What Determines the Allocation of Aid?

Previous studies of aid allocation have concluded that foreign aid is allocated not only according to development needs but also according to donor self‐interest. We revisit this topic and allow for donor‐ as well as recipient‐specific effects in our analysis. In addition to comments on the statistical significance of our results we assess the relative economic importance of recipient need, merit, and donor self‐interest. Our results indicate that all bilateral donors allocate aid according to their self‐interest and recipient need. However, most bilateral donors seem to place little importance on recipient merit. Less than 1% of the variance of aid is accounted for by merit, ceteris paribus. The UK and Japan are exceptions: they allocate more aid to countries with higher growth, higher democracy scores, and fewer human rights abuses.     

Spatial effects of foreign direct investment in US states

Abstract This paper estimates the aggregate productivity effects of Marshallian externalities generated by foreign direct investment (FDI) in US states, controlling for Marshallian externalities and other spatial spillovers generated by domestic firms. A regional production function framework models externalities and other spatial spillovers explicitly as determinants of total factor productivity. We employ a system generalized method of moments (GMM) estimator to account for the potential endogeneity of FDI and the presence of spatial lags. Using data for US states from 1977–2003, the results indicate that FDI generates positive externalities, while externalities from domestic firms are negative.     

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.     

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.