Is the Threat of Foreign Aid Withdrawal an Effective Deterrent to Political Oppression? Evidence from 53 African Countries

This article complements existing literature on the aid-institutions nexus by focusing on political rights, aid volatilities, and the post-Berlin Wall period. Our findings show that, while foreign aid does not have a significant effect on political rights, foreign aid volatilities do mitigate democracy in recipient countries. Such volatilities could be used by populist parties to promote a neocolonial agenda, instill nationalistic sentiments, and consolidate their grip on power. This is especially true when donors are asking for standards that the majority of the population in control does not want and political leaders are unwilling to implement them. Our empirical evidence is based on 53 African countries for the period from 1996 to 2010. As a main policy implication, creating uncertainties in foreign aid for political rights enhancement in African countries may achieve the opposite results. We also discuss other implications, including the need for an “After-Washington” Consensus.     

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.     

Foreign Aid,Incentives and Efficiency: Can Foreign Aid Lead to the Efficient Level of Investment?

This paper develops a two‐period model in which the recipient faces borrowing constraint and the donor is a Stackelberg follower to address two important policy questions: (i) whether foreign aid can lead to the efficient level of capital investment in the recipient country and (ii) how does the form (e.g. budgetary transfers, capital transfer) and the timing of aid affect the recipient's financial savings and capital investment. It finds that the disincentive effect of the capital transfer on the capital investment by the recipient is larger than the budgetary transfers. It makes financial savings more attractive relative to the capital investment for the recipient. In the absence of capital transfer, the multi‐period budgetary transfers not only lead to the efficient level of capital investment by the recipient, but also achieve the same allocation as under commitment. The capital transfer can lead to the efficient level of capital investment, but in this case, it completely crowds out the recipient's own capital investment.     

Who Gives Foreign Aid to Whom and Why?

This paper studies the pattern of allocation of foreign aid from various donors to receiving countries. We find considerable evidence that the direction of foreign aid is dictated as much by political and strategic considerations, as by the economic needs and policy performance of the recipients. Colonial past and political alliances are major determinants of foreign aid. At the margin, however, countries that democratize receive more aid, ceteris paribus. While foreign aid flows respond to political variables, foreign direct investments are more sensitive to economic incentives, particularly good policies and protection of property rights in the receiving countries. We also uncover significant differences in the behavior of different donors.     

When is reputation bad?

In traditional reputation models, the ability to build a reputation is good for the long-run player. In [Ely, J., Valimaki, J., 2003. Bad reputation. NAJ Econ. 4, 2; http://www.najecon.org/v4.htm. Quart. J. Econ. 118 (2003) 785–814], Ely and Valimaki give an example in which reputation is unambiguously bad. This paper characterizes a class of games in which that insight holds. The key to bad reputation is that participation is optional for the short-run players, and that every action of the long-run player that makes the short-run players want to participate has a chance of being interpreted as a signal that the long-run player is “bad.” We allow a broad set of commitment types, allowing many types, including the “Stackelberg type” used to prove positive results on reputation. Although reputation need not be bad if the probability of the Stackelberg type is too high, the relative probability of the Stackelberg type can be high when all commitment types are unlikely.     

When is there state independence?

Whether a preference relation can be represented using state-independent utilities as opposed to state-dependent utilities may depend on which acts count as constant acts. This observation underlies an extension of Savage's expected utility theory to the state-dependent case that was proposed in this journal by Edi Karni. His result contains a condition requiring the existence of a set of acts which can play the role of constant acts and support a representation involving a state-independent utility function. This paper contains necessary and sufficient conditions on the preference relation for such a set of acts to exist. Results are obtained both for the Savage and the Anscombe and Aumann frameworks. Among the corollaries are representation theorems for state-dependent utilities. Relationships to Karni's work and extensions of the results are discussed.     

Does Foreign Aid Promote Growth? Exploring the Role of Financial Liberalization

This paper examines the impact of foreign aid on the process of economic development in India by controlling for the degree of financial liberalization. A composite index is constructed using the method of principal component analysis to capture the joint influence of various financial sector policies. The results show that while foreign aid exerts a direct negative influence on output expansion, its indirect effect via financial liberalization is positive. Therefore, an important implication of the findings in this paper is that adequate liberalization in the financial system of the host country is a crucial requirement for effective foreign aid. Our results are robust to a number of control variables and estimation techniques.     

When is the optimal lending contract in microfinance state non-contingent?

Whether a microfinance institution should use a state-contingent repayment or not is very important since a state-contingent loan can provide insurance for borrowers. However, the classic Grameen bank used state non-contingent repayment, which is puzzling since it forces poor borrowers to make their payments even under hard circumstances. This paper provides an explanation to this puzzle. We consider two modes of lending, group and individual lending, and for each mode we characterize the optimal lending and supervisory contracts when a staff member (a supervisor) can embezzle borrowers’ repayments by misrepresenting realized returns. We identify the main trade-off between the insurance gain and the cost of controlling the supervisor's misbehavior. We also find that group lending dominates individual lending either by providing more insurance or by saving audit costs.     

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.     

When is FDI a capital flow?

In this paper we analyze the conditions under which a foreign direct investment (FDI) involves a net capital flow across countries. For this purpose, we investigate how multinational firms finance their foreign affiliates, globally or locally. We develop a contract theoretical model in which the financing structure is used to govern the incentives of managers. We find that the investment tends to be financed locally if managerial incentive problems are large. Thus, microeconomic governance problems may have macroeconomic implications for the net capital flow to host countries. Our results are consistent with survey data on German and Austrian investment flows of firms to Eastern Europe.     

Do Psychological Fallacies Influence Trading in Financial Markets? Evidence from the Foreign Exchange Market

Research in both economics and psychology suggests that when agents predict the next value of a random series they frequently exhibit two types of biases, which are called the gambler's fallacy (GF) and the hot hand fallacy (HHF). The GF is to expect a negative correlation in a process that is in fact random. The HHF is more or less the opposite of this—to believe that another heads is more likely after a run of heads. The evidence for these fallacies comes largely from situations where they are not punished (lotteries, casinos, and laboratory experiments with random returns). In many real-world situations, such as in financial markets, succumbing to fallacies is costly, which gives an incentive to overcome them. The present study is based on high-frequency data from a market maker in the foreign exchange market. Trading behavior is only partly explained by the rational exploitation of past patterns in the data. There is also evidence of the GF: a tendency to sell the dollar after it has risen persistently or strongly.     

When is multidimensional screening a convex program?

A principal wishes to transact business with a multidimensional distribution of agents whose preferences are known only in the aggregate. Assuming a twist (= generalized Spence-Mirrlees single-crossing) hypothesis, quasi-linear utilities, and that agents can choose only pure strategies, we identify a structural condition on the value b(x,y) of product type y to agent type x — and on the principal?s costs c(y) — which is necessary and sufficient for reducing the profit maximization problem faced by the principal to a convex program. This is a key step toward making the principal?s problem theoretically and computationally tractable; in particular, it allows us to derive uniqueness and stability of the principal?s optimal strategy — and similarly of the strategy maximizing the expected welfare of the agents when the principal?s profitability is constrained. We call this condition non-negative cross-curvature: it is also (i) necessary and sufficient to guarantee convexity of the set of b-convex functions, (ii) invariant under reparametrization of agent and/or product types by diffeomorphisms, and (iii) a strengthening of Ma, Trudinger and Wang?s necessary and sufficient condition (A3w) for continuity of the correspondence between an exogenously prescribed distribution of agents and of products. We derive the persistence of economic effects such as the desirability for a monopoly to establish prices so high they effectively exclude a positive fraction of its potential customers, in nearly the full range of non-negatively cross-curved models.     

(When) Should We Use Foreign Direct Investment Data to Measure the Activities of Multinational Corporations? Theory and Evidence

This paper reviews the different concepts of measuring activities of multinational corporations. It aims at working out the economic relationships that theoretically exist between these measures under general economic assumptions and then empirically investigates to which extent such relationships exist in the data. As a main conclusion, foreign direct investment (FDI) stock data is indeed a good proxy for measuring most real economic activities of multinational firms. Discrepancies between FDI stock and other data can to a large extent be given a reasonable economic meaning, but observed asset‐to‐employment patterns in multinational production also call for more thorough future research.     

Do Foreign Currency Accounts Help Relax Credit Constraints? Evidence from Nepal

We analyse a novel bank‐level data set from Nepal, where domestic and foreign currency (FX) deposits are reported separately on the liability side of commercial bank balance sheets. In a panel regression analysis, we estimate semi‐accounting‐identities that allow us to identify the marginal sources of financing for various asset positions. We find that banks hedge against FX exposure via their sectoral lending composition: banks with a large share of FX deposits primarily lend to firms in traded‐goods sectors. Loans to non‐traded sectors are mostly financed by domestic deposits. While earlier studies have documented a positive impact of FX accounts on financial development, our analysis suggests that this does not need to imply that severely credit constrained sectors are the main beneficiaries of this process.     

When is money neutral under flexible exchange rates?

The paper studies the conditions for the neutrality of money under flexible exchange rates in an extended real-wage Mundell–Fleming model, with special emphasis on the specification of the behavior functions to correspond to their foundations in closed-economy macrotheory.It is shown that monetary expansion causes output first to decline, to eventually rise above its original level. However, if interest earnings on foreign securities dominate the trade balance in the expression for the exchange rate, monetary expansion leads to an appreciation of the exchange rate, while having an expansionary output effect. Money is neutral in the long run if either the wealth effect or foreign interest payments are abstracted from; if both are abstracted from, it is neutral also in the short run. Short and long-run neutrality results also if wealth consists only of foreign securities. The above responses hold both for net creditors and – with a minor qualification – debtors.     

When is the Nation? Constituent Elements and Processes

Two types of approach to the question 'When is the Nation?' are discussed: conditional and temporal. The relationship between the two approaches are analysed on three levels. First, through an analysis of various theories of nation and nationalism, it argues that determination of the emergence of the nation through enumeration of different 'constituent elements' fails to distinguish the nation from other social groups. Second an analysis of Croatian nationalist ideologies reveals numerous potentialities to define the same nation by emphasizing various, and sometimes contradictory, constituent elements. Finally, a survey conducted on a sample of Croatian population shows that there is no final set of constituent elements that could define the same nation in a specific historical moment. Therefore, the article concludes that the question 'When is the Nation?' could be answered mainly by identifying specific social processes.     

When is a Nation? Comparing Lithuania and Georgia

The article uses a constructivist reformulation of the question 'when is a nation?' as a parameter of comparison for the analysis of nationalist discourses on history in post-socialist Lithuania and Georgia. It shows that Lithuanian nationalists, by means of a critical reassessment of national history, described the nation as something that still had to be created, whereas Georgian nationalists referred to the unchallenged image of a glorious past and so treated the nation as something to be simply picked up from history. It is also argued that these diverging historiographical narratives correspond to different conceptualisations of the notion of the nation. While Lithuanians nationalists conceptualised the nation in the tradition of the French Revolution as a category that aims at the reconfiguration of state-society relations, Georgian nationalists identified it with traditional modes of organising social relations.