Do Foreign Aid Transfers Distort Incentives and Hurt Growth? Theory and Evidence from 75 Aid-recipient Countries

In this paper, foreign aid transfers can distort individual incentives, and hence hurt growth, by encouraging rent-seeking as opposed to productive activities. We construct a model of a small growing open economy that distinguishes two effects from foreign transfers: (i) a direct positive effect, as higher transfers allow the financing of infrastructure; (ii) an indirect negative effect, as higher transfers induce rent-seeking competition on the part of self-interested individuals. In this framework, the growth impact of aid is examined jointly with the determination of rent-seeking behavior. We test the main predictions of the model for a cross-section of 75 aid-recipient countries between 1975 and 1995. There is evidence that aid has a direct positive effect on growth, which is however significantly mitigated by the adverse indirect effects of associated rent-seeking activities. This is especially the case in recipient countries with relatively large public sectors.foreign aid, incentives, growth

Governance crises and the Andean region: A political economy analysis

The Andean countries, a region with abundance of natural resources and other valuable assets, exhibit a variety of governance problems that hinder its potential for social peace, stability and economic prosperity. Their empirical governance record, based on historical and recent data, although varies from country to country has been characterized by political instability, considerable frequency of constitutional reforms, presidential crisis, volatility of democratic institutions and violence. In turn, the empirical evidence on quality of institutions put the Andean region in a relatively modest place in international rankings of (survey-based) indices of voice and accountability, rule of law, regulatory burden, control of corruption, political instability and violence although improvements are also detected in some of these governance dimensions. Institutional reform, in a broad sense, is needed to ensure the basic conditions of economic development.

Tax compliance with uncertain income: a stochastic control model

This paper examines the compliance behaviour of a taxpayer endowed with a stochastic income, taking into account dynamical factors as public and private investments, within a stochastic control framework. Assuming logarithmic utilities and thanks to a suitable rewrite of the problem, we provide an existence and uniqueness result for the solution of the Hamilton–Jacobi–Bellman equation associated to the control problem, and we rely on a symbolic and numerical algorithm to study its solution. Moreover, we implement a Monte Carlo simulation in order to determine an estimate of the mean and the variance of the total declared income together with a confidence interval. To illustrate how the method works, we present a computational example where we assign values to the parameters. In this case we perform a sensitivity analysis, showing how the total declared income is affected by public and private investments, probability of being discovered, fine, tax rate and income uncertainty

Openness, Institutions, and Policies: Determinants of Globalisation and Economic Growth in Developing Countries

Globalisation describes the increasing integration of national economies through international trade, capital transfers, and the exchange of information or knowledge. This paper focuses exclusively on trade integration. Most economists hold that reducing trade barriers has a decisive positive effect on economic growth and poverty reduction (“openness hypothesis”). However, some economists diagnose deficient or weakly enforced non-market institutions as the major cause of slow growth. The main goal of this paper is to show that these two seemingly contrary points of view do not exclude each other. Openness is not only influenced by trade policy but also by other policies and the quality of institutions. Available data show a high negative correlation between the logarithm of tariff rates and indicators of the quality of institutions. Cross-national growth regressions demonstrate that the explanatory power of trade protection and a combined measure of openness, on the one hand, and institutional quality, on the other hand, is comparable. Therefore, it is concluded that liberal trade policies are recommendable, but must be complemented by sound macroeconomic management, micro-policy to strengthen domestic competition, and institutional improvements.

Ethnic Diversity and Economic Performance

We survey and assess the literature on the positive and negative effects of ethnic diversity on economic policies and outcomes. Our focus is on both focus both cities in developed countries (the US) and villages in developing countries. We also consider the endogenous formation of political jurisdictions and we highlight several open issues in need of further research.

The Role of the Natural Resource Curse in Preventing Development in Politically Unstable Countries: Case Studies of Angola and Bolivia

For about three decades now, development economics researchers have consistently claimed that third world resource-rich countries were not developing as well and/or as fast as they were expected to, given that their natural resources endowment was considered a great opportunity for development. The phenomenon of underperformances concerning primary commodity exporters relative to non resource-rich countries has been often referred to as to the “Natural Resource Curse”. The authors use an historical and political approach to the manifestations of the curse in the specific cases of Angola and Bolivia, both resource abundant countries, but suffering among the lowest development standards in their respective continents. In chapter one, the authors make a quick review of the literature explaining both causes and manifestations of the Resource Curse. The authors go beyond the classical Dutch Disease explanations and show how natural resources lead to behaviours of looting, rent-seeking and civil confrontations. In chapter two, the authors present the framework where they adjust the “African Anti-growth Policy Syndromes” described by Paul Collier to the specific case of the Natural Resource curse. In addition, they add some considerations of the negative effect of natural resource extraction by analysing externalities on environment, education and inequalities. Chapters three and four analyse the case studies of Angola and Bolivia respectively, emphasizing the role of historical context explaining policy behaviour and the critical impact of unexpected windfalls and sudden price collapses. The authors find that natural resources could sustain long lasting conflicts, but that conditions of fractionalization of society determine the possibility of conflict. A country divided in two rigid political factions is more prone to internal conflict, like in Angola, whether in countries where frontiers between blocks are blurried or the country is multi-polar, like in Bolivia, the risks of long-lasting civil war seem less important. Apart from conflict, the authors show that lack of institutions and inequality make of natural resources a source of political instability that has far more impact on economic performances than other factors.Natural Resource curse, Rent-seeking, Civil War, Angola, Bolivia

Ethnic Diversity and Economic Performance

We survey and asses the literature on the positive and negative e?ects of ethnic diversity on economic policies and outcomes. Our focus is on countries, on cities in developed countries (the US) and on villages in developing countries. We also consider the endogenous formation of political jurisdictions and we highlight several open issues in need of further research.

Oil and gas: a blessing for few hydrocarbons and within-region inequality in Russia

Building on earlier work on regional inequality in Russia (Fedorov 2002; Gaddy and Ickes 2005; Bradshaw 2006 and others) we investigate a novel line of research, i.e. to demonstrate that the regional oil and gas abundance is associated with high within-region inequality. We show empirically that hydrocarbons represent one of the leading determinants of an increased gap between rich and poor in the producing regions. We discuss a possible cluster of geographic, economic and political factors underlying the phenomenon

Federalism, Regional Redistribution, and Country Stability

In recent decades a large number of new sovereign states has been created through secessions, decolonization and breakup of existing countries. Since 1990 the Soviet Union split into fifteen independent countries, Yugoslavia gave away to six sovereign states (not counting Kosovo), Czechoslavakia broke into two separate states, Eritrea seceded from Ethiopia, Namibia gained indepen- dence from South Africa, and Timor Leste left Indonesia. Today there are 193 internationally recognized sovereign states in the world, up from 74 in 1945 (the latest UN member is Montenegro, which joined in 2006). At the same time numerous countries, while remaining unified, have taken steps towards more regional autonomy and decentralization. Regional redistribution, decentralization and federalism have played a prominent role in political debates across Europe (e.g., in Belgium, Italy, Spain, the United Kingdom) and all over the world--from Cananda to Colombia, from Nigeria to South Africa, from Iraq to India.