Aid, policies and Growth Craig BURNSIDE and David DOLLAR American economic review September,2000 1...

Aid, policies and Growth

Craig BURNSIDE and David DOLLARAmerican economic reviewSeptember,2000

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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

What we already know : a brief reminder

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• The aim of the paper is to analyze the relationship among foreign aid, economic policies and growth of GDP per capita.

• Aid effectiveness, under ‘good policy condition’

• Questions the authors are asking: 1) Is the effect of aid conditional on economic policies? 2) Do donor governments and agencies allocate more aid to countries with good policies? 3) What other factors affect growth and aid flows?

• Hypothesis of the model : Aid affects growth but its impact is conditional on the same policies that affect growth

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What we already know

I) Principal topics

Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

II) 3 sets of equations

• Growth equation

• Aid equation:

• Government consumption equation: function of the institutional-political variables that affect growth

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III) Data specifications

• The World Bank Debt Reporting System: official multilateral and bilateral aid and loans received by the developing countries, 6 four-year time periods from 1970 until 1993 ;

• 56 countries, 275 observations. low income : 40 countries, 189 observations ;

• Limits :o panel data estimator should have been used ;o endogeneity of other regressors than aid/gdp ;o missing regressors ;o endogenous sample selection driven by the availibility of

regressors.5



IV) The policy index

• Index constructed with : the budget surplus, the inflation rate and the openness dummy . This index interacts with foreign aid :

• Critics:o there may exist other pertinent policy variables ;o the weights depend on the other regressors in the equation:

they are not « equal » for each of the three variables (those variables were not standardized).

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Going further

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Litterature review

Regression results : a two stages approach

Determinants of Aid

Impact of Aid on government consumption

Conclusion

Reply and critic


• BOONE (1995, 1996) : Foreign aid has not raised growth rates in the typical poor country ;

• SACHS & WARNERS (1995) : Budget surplus, inflation rate and openness dummy modelisation ;

• GRIFFIN (1970), WEISSKOPF (1972), CHENERY& SYRQUIN (1975), MOSLEY & AL. (1987), LEVY (1988) : impact measurement of aid on savings , investment and growth in developing countries without interaction of aid and policy ;

• FREY & SCHNEIDER (1986) : the commitment of the World Bank assistance is associated with good policies such as low inflation

Litterature review

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I) Full data set : Define a policy index excluding terms involving aid

• Formation of the policy index below using the regression coefficients :

• The growth regression determine the relative importance of the different policies in the index ;

• The constant 1,28 : country’s predicted growth rate given its budget surplus, inflation rate and trade openness.

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most significant variables


II) Full data set : Introduction of Aid/GDP with ind. policy variables

• The partial correlation between aid and policy variables is close to 0 ;

• Variables which remain significant ;

• Hypothesis : positive correlation between aid and the error term ;

• With either OLS and 2SLS estimator there is no significant relationship between aid and growth.

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III) Full data set : Introduction of the policy index

• The coefficient on policy is very close to 1 and the coefficient on aid remains small and insignificant ;

• Others variables retain their quantitative magnitudes and significance ;

• OLS and 2SLS results are similar .

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IV) Full data set : Introduction of two interactive terms• New interactive

terms ;

• OLS results : aid itself has a small insignificant coefficient but aid interacted with policy has a significantly positive coefficient whereas the quadratic term has a negative one ;

• The impact of aid on growth is a positive function of the level policy and a negative function of the level of aid. 13



V) Full data set : Dropping the outliers

• Five big outliers on a specific range of years has been dropped ;

• The quadratic term becomes insignificant ;

• The interaction between aid and policy is significant in OLS and 2SLS. 14

Regression results : an two stages approach


VI) Focus on low income countries : regression with no int. terms

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Kenza BACHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

• Results quite consistent with the previous findings ;

• Aid appears to have no significant impact on growth.

VII) Focus on low income countries : introducing int. of aid & policy

• OLS : the simple interaction term and the quadratic term are both significant.

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Regression results : an eight steps approach


VIII) Focus on low income countries : dropping the outliers

• Without outliers, the coefficient on aid * policy is highly significant in both OLS and 2SLS.

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IX) Final results : impact of aid and policy on growth

• If the interaction of aid and policy is omitted, the estimates are never significantly different from zero ;

• With interaction term added, we consistently find the impact of aid is greater in a good policy environment than in a poor policy environment.

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Regression results : a two stage approach


X) Going further : explanation of the interaction of aid and policy

• 13 observations of the largest values of unexplained Aid/GDP *policy ;

• Quid ? 19



Determinants of Aid

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Determinants of Aid

• Smaller and poorer countries get more aids

• Donors strategic interest have no impact (except for Egypt)


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Determinants of Aid

• Even if it plays a role more important for bilateral aid than multilateral aid ;

• Policy has an impact only on multilateral aid whereas it represents only 1/3 of total aids.



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• Aid associated with donor interest, mainly bilateral aid, increases government consumption ;

• However government consumption has no impact on growth ;

• Can provide some insights into why aid is not effective in the typical recipient country.


Conclusion

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• Aid is more efficient on growth in good policy environment ;

• There is no tendency for aid to favor good policy but multilateral aid is allocated in favor of good policy ;

• Bilateral aid is positively correlated with government consumption ;

• Can explain why the impact of foreign aid on growth is not more positive ;

• Recommendations : making aid more systematic conditional on the quality of politics would increase its impact on growth ;

• Climate for effective aid is increase while the amount of aid decrease. 26

Conclusion


Critic & reply

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Critic & reply

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Easterly, Levine and Roodman – Aid, policies and growth, comment, 2004

• They reexamine whether aid influences growth in the presence of good policies ;

• They add countries and observations to the original data set ;

• They use exactly the same methodology ;

• They show the robustness of the relationship between aid, growth and policies.


Aid, policies and growth : reply from Burnside and Dollar, 2004

• Data set of Easterly and al is larger than Burnside and Dollar ones and does not define all variables in the same way ;

• The additional countries in their data set are responsible for the different results ;

• They reject the fact that aid has no effect on growth in all environments.

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Critic & reply


Any question?

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Thank you

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Kenza BACHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

Aid, policies and Growth Craig BURNSIDE and David DOLLAR American economic review September,2000 1...

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