Local Financial Development and the Aid-Growth Relationship

With official development assistance (ODA) set to rise as countries strive to meet the Millennium Development Goals (MDGs), aid effectiveness remains an important area of development policy. An increasing number of studies support the notion that ODA can contribute to growth in a nonlinear relationship. In this paper, we investigate a new hypothesis regarding this relationship: that deeper financial markets in aid-recipient countries facilitate the management of aid flows, thereby enhancing aid effectiveness. An empirical analysis, using a panel data set, finds robust support for the hypothesis.Foreign aid,economic growth,poverty,financial development

EU cohesion policy and “conditional” effectiveness: What do cross-section regressions tell us?

About one third of total EU budgetary resources are spent on implementing cohesion policy. Therefore, it is understandable that the European Commission and especially donor states (acting for the taxpayers) need to be reassured that their contributions are spent wisely and are being used effectively in achieving their stated goal of promoting growth and thereby reducing welfare differences throughout the Union. Different evaluation methods have been proposed to look at the likely impact of Structural Funds interventions ranging from macroeconometric models to case studies. Recently, evaluation results based on enhanced growth rate regressions with panel data have received wide interest. Ederveen et al. (2006, 2002) are two widely cited works that address the evaluation of the effectiveness of cohesion policy using the single equation, panel dataset approach. The results support a serious critique of cohesion policy, asserting that its effectiveness is conditional on country characteristics that may be in short supply in many poorer member states (e.g., the quality of public institutions), and that cohesion policies should not be implemented in the new member states unless the institutional capacities are installed. This paper takes a closer look at the Ederveen et al. results, mainly from three directions. Firstly, we discuss some issues concerning the general set-up of the database and the time period that was used, secondly show that their preferred regression seems mis-specified and instable concerning the countries included and the time period used and thirdly discuss in more general terms that the use of this methodology in the whole area of policy evaluation has been shown to be deeply flawed and to tell us nothing about the effectiveness of public policy. Our analysis of the methodology and results of Ederveen et al. drive us to the conclusions that the policy recommendations derived from this work are unsound, unwise and without merit. In particular, the recommendations concerning the new EU member states should not be based on an appeal to the cross-section regressions that are presented in their 2006 paper. In contrast, we propose two other approaches – the macroeconometric modelling approach and the microeconomic approach - which, if developed together, hold out the possibility of more robust and insightful analysis and conclusions. Only by looking deeper into the manner in which EU Cohesion Policy is actually designed and implemented, the manner in which national governments operate parallel regional policies with no reference to Brussels, and by making use of more searching and holistic models is it likely to be possible to deliver verdicts on whether or not the EU has a role in this important area of integration, and if the answer is “yes”, how that policy can be modified in light of the recent enlargements. Dogmatic conclusions reached in the literature, mainly negative, but the point also applies to supportive conclusions, are premature and almost certainly wrong.

The effect of reduced unemployment duration on the unemployment rate: a Synthetic Control Approach

This paper examines the impact of the fourth partial revision of the law of unemployment insurance (AVIG) on unemployment dynamics in Switzerland at a cantonal level. The authors apply the Synthetic Control Method (SCM), a matching method for comparative case studies. A counterfactual analysis of the cases studied is performed by combining a control group of several untreated units, which provides a better comparison to the treatment group than a single unit. The control unit is designed as a weighted average of the available cantons in the donor pool, taking into account the similarities between the chosen controls and the treated unit. Once policy changes are controlled, the results suggest a significant effect on the unemployment rate at a cantonal level: the reform had a discernible impact on lowering the unemployment rate in the Italian- and French-speaking cantons in Switzerland

Convergence of Health Expenditure in Sub-Saharan Africa: Evidence from a Dynamic Panel

To address the problem of underfunding of health systems in SSA the Abuja Declaration of 2001 set a target to allocate 15% of a country’s budget to public health expenditure. However there is no empirical evidence on whether SSA countries are converging or diverging from the target and whether there is significant effect of the Abuja instrument on other health expenditure indicators. This study tested convergence of health expenditure in SSA in the post Abuja declaration period. The linear dynamic panel model was estimated by GMM-IV method on a panel of 41 SSA countries for the period 2000 to 2011. The empirical results show evidence of absolute and conditional convergence of health expenditure in SSA. Real income per capita, donor funding for health care and benefitting from HIPC debt relief influenced direction and rate of convergence of health expenditure. The Abuja policy instrument (public health expenditure as a percent of government) reduced the rate of convergence of other health expenditure measures except for private health expenditure as percent of total health expenditure which was increasing in the study. The results imply that continued reliance on donor funding for health systems directly or through debt relief is likely to delay convergence to Abuja target. SSA governments can formulate sustainable health financing mechanisms that reduce dependency on external source for health system support in the long run. Keywords: Convergence, Health Expenditure, SSA, Dynamic Pane

Foreign Aid, Political Power and FDI: Do Aid-dependent Institutions Facilitate Investment in Africa?

In this article, we examine the nexus between foreign development assistance and the attraction of foreign direct investment (FDI) through a de facto political power, as an aid-seeking and likely aid-dependent group. We apply structural equation modelling to investigate the direct and indirect effect of aid on FDI via economic institutions for a sample of 42 African countries from 2002 to 2016. Our results corroborate a direct positive effect of aid and institutions on FDI as a productive financial source. However, an aid-dependent de facto political power does not improve the economic institutions, and within a broad institutional context, it may even worsen them, evidencing the indirect effect of reducing a country’s attractiveness for FDI. This study offers robust evidence under different specifications and variables of institutions in addition to several controls for political and strategic interests and economic conditions. We ultimately develop a model explaining why aid barely makes any contribution to institutional reforms. In countries that are heavily dependent on aid, the beneficiary group is discouraged from improving institutional qualities as the source of benefits would be discontinued

Do Campaign Contribution Limits Curb the Influence of Money in Politics?

Over 40% of countries around the world have adopted limits on campaign contributions to curb the influence of money in politics. Yet, we have limited knowledge on whether and how these limits achieve this goal. With a regression discontinuity design that uses institutional rules on contribution limits in Colombian municipalities, we show that looser limits increase the number and value of public contracts assigned to the winning candidate’s donors. The evidence suggests that this is explained by looser limits concentrating influence over the elected candidate among top donors and not by a reduction in electoral competition or changes in who runs for office. We further show that looser limits worsen the performance of donor-managed contracts: they are more likely to run over costs and require time extensions. Overall, this paper demonstrates a direct link between campaign contribution limits, donor kickbacks, and worse government contract performance

Foreign Aid and Fiscal Resources Mobilization in WAEMU Countries: Ambiguous Effects and New Questions

This paper analyzes the effect of different types of foreign aid on tax revenues in West African Economic and Monetary Union (WAEMU) countries. A fixed-effects panel model with instrumental variables was developed over the period spanning from 1985 to 2016. The results indicate that multilateral aid affects positively and significantly tax revenues while bilateral aid does not. Moreover, the analysis of the decomposed effect of aid revealed that concessional aid and technical assistance enhance fiscal resources mobilization. However, grants reduce tax effort. The results also show that when aid is aggregated, its effect on tax revenues is ambiguous. These results justify for many reasons the reorientation of foreign aid towards investment for effective tax systems in WAEMU countries in compliance with Addis Ababa Action Agenda 2015 of the third international conference on Financing for Development. Strengthening multilateral partnership is advocated in accordance with the 17th Sustainable Development Goals. Also, an improvement of institutional quality could make foreign aid more efficient for tax collection in the study areas

The effect of inheritance taxation on labour supply

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The political economy of relief aid allocation: evidence from Madagascar.

This paper studies the political economy of relief aid allocation using empirical evidence from relief programs after a major cyclone (Gafilo) hit Madagascar in March 2004. Relief was provided by the Government of Madagascar as well as local and international aid agencies. Aid allocation was generally more likely in areas with a higher need for aid, but there were substantial differences between aid allocation by the government and by international aid agencies. The likelihood of receiving aid from the government was higher in cyclone-affected communes with higher radio coverage and with stronger political support for the government. Relief from aid agencies was not affected by media or political factors but was more likely to go to poorer and easier accessible communes, whether or not they were affected by the cyclone.

Beyond treatment effect estimation; new developments in policy evaluation

To what extent are hiring incentives targeting a specific group of vulnerable unemployed people more effective with respect to generalized incentives without a definite target? Do targeted policies have negative side effects on the labor market that are too important to accept them? Which are the channels guaranteeing a long-lasting effect of European Structural Funds? Even though there is vast literature on hiring subsidies and European Structural Funds, these questions remained unanswered. To answer them, it is necessary to go beyond the simple treatment effect estimation. We did it following two different paths. To answer the first two questions we compared the impact of two similar hiring policies, one oriented towards a target group of long-term unemployed people and one generalized, implemented on the Italian labor market. We considered administrative data on job contracts and workers, and applied counterfactual analysis methods. The results show that only the targeted policy has a positive and significant impact, while the effects of the generalized policy on the vulnerable group are negligible. Moreover, we did not detect any indirect negative side effect of the targeted policy on the local labor market. To answer the third question we introduced a new methodology, namely the Mediation Analysis Synthetic Control (MASC) and applied it to investigate on the impact of European Structural Funds reduction in Abruzzi region. MASC is a generalization of the Synthetic Control Method (SCM) that allows decomposing the total effect of the intervention into its indirect effects and its direct effect when data on only one treated and few control units are available. The results show that the negative impact of European Structural Funds reduction on economic growth is mainly driven by the indirect effect passing through employment reduction. Instead, only a small portion of the negative impact is due to the indirect effect passing through investments reduction