On the Pitfalls of Measuring Aid

Development aid, Aid accounting, ODA, EDA

Empirical evidence on the new international aid architecture

We conduct an empirical study on how 22 donors allocate their bilateral aid among 147 recipient countries over the 1970-2004 period to investigate whether recent changes in the international aid architecture at the international and country levelhave led to changes in donor behavior. We find that after the fall of the Berlin Wall and especially in the late nineties, bilateral aid responds more to economic needs and the quality of a country’s policy and institutional environment and less to debt, size and colonial and political linkages. We also find more selectivity by donors when a country uses a PRSP and passes the HIPC decision point. Importantly, PRSPs and HIPCs reduce the perverse effects of large bilateral and multilateral debt shares on aid flows, suggesting less defensive lending. Overall, it appears certain international aid architecture changes have led to more selectivity in aid allocations. The specific factors causing these changes remain unclear, however. And since there remain (large) differences among donors in selectivity that appear to relate to donors’ own institutional environments, reforms will have to be multifaceted.development aid, aid allocation, selectivity, debt relief, HIPC, PRSP, aid architecture

In Search of Financial Globalization Traps

The question whether global financial integration is beneficial for everyone remains highly disputed. It is often assumed that financial globalization involves threshold effects, where integration is worthwhile only when certain preconditions are met. However, it has also been noted that financial account liberalization also brings about considerable additional indirect benefits. These indirect benefits are often the same as the preconditions, such that there exists a complex two-way relationship between financial globalization and the preconditions/additional benefits. Such a relationship can lead to financial globalization traps, where some economies are trapped at a low level stable equilibrium, while others enjoy ever increasing financial integration. In this paper, we use de facto indicators of international financial integration to investigate if the dynamics of financial integration exhibit signs of such thresholds and traps. We present a parametric way of estimating these important parameters, based on recently developed sample splitting and threshold estimation methods. We find that there are indeed signs of multiple equilibriums if we look at the growth rates of total assets and liabilities. We also find that a group of countries are apparently caught in a high debt stock trap.

Aid Effectiveness, Debt Relief and Public Finance Response: Evidence from a panel of HIPC Countries

Through the Heavily Indebted Poor Countries (HIPC) Initiative, substantial amounts of debt relief have been granted to a set of low-income countries as an alternative instrument of aid delivery. The theoretical (and moral) arguments in favour of debt relief are well established. However, the question whether debt relief is a more effective instrument of development assistance in practice is an empirical question. Hence, in this paper we investigate, for a panel of 28 decision point HIPC countries, the intertemporal linkages between debt relief and other fiscal variables such as current expenditure, government investment, taxation and domestic borrowing, in comparison to the effects of more traditional forms of development assistance, namely (non-debt relief) grants and concessional loans. To do so, we estimate a panel VAR and look at impulse response functions. Overall, we find that HIPC (only) debt relief impact on fiscal variables to follow fairly complex dynamics. For example, debt relief initially reduces government investment, but the effect becomes positive after two years, well outperforming other modes of aid delivery.

Legal and Institutional Barriers to Optimal Financial Architecture for New Economy Firms in Developing Countries

developing countries, new economy, ICT, law and finance, legal constraints

The Aid 'Darlings' and 'Orphans' of the Great Lakes Region in Africa

In this paper we look at the developmental consequences of aid flows on the Great Lakes Region in Africa. The reshuffling of international relations after the end of the cold war has dramatically changed the exogenous influence of external actors on the agency of local and regional actors in the developing world. Our main hypothesis is however, that political considerations and donor coordination problems still play an important role in directing aid, although in a very different fashion compared to the cold war era. The region of the Great Lakes in Africa is a good illustration of the « darlings » versus « orphans » policy of official development assistance (ODA). Following a new selectivity principle, extensive structural aid is only allocated to those countries who exhibited a very particular form of “good governance” to which donors are sensitive, while “failed states” cannot qualify for structural ODA. This has led to the “aid darling” status of Rwanda and the “aid orphan” status of Zaire/DRCongo and Burundi. Our contention is that these choices have unduly inflicted high costs to these two latter countries and to the region. Since their economies are extremely aid dependent, the allocation of aid has a considerable impact on economic development as we try to show in this article. Departing somewhat from the dominant pessimist stance on the effectiveness of aid in Sub Sahara Africa we will try to show that overall, the costs of exclusion are detrimental for economic development and create regional and even international public ‘bads’ because of the spill-over effects of exclusion on the region.

An assessment of debt-for-education swaps. Case studies on swap initiatives between Germany and Indonesia and between Spain and El Salvador

In the light of worldwide commitments to meet global basic learning needs made at the 1990 United Nations Conference on Education for All (EFA) in Jomtien, the 2000 World Education Forum in Dakar and the 2000 United Nations Millennium Summit in New York, UNESCO has established a Working Group on Debt Swaps for Education which has met on two occasions so far, in 2006 and 2007. Drawing on experiences of bilateral donors such as Spain and Germany, this UNESCO Working Group is now promoting debt-for-education swaps, constructions whereby external debt is cancelled by the creditor in exchange for the debtor government’s commitment to mobilise domestic resources for education sector spending. The experience with debt swaps in the mid 1990s was, however, far from positive, and recent improved insight in the economics of debt relief suggests extreme caution. In reviewing debt-for-education swaps between Germany and Indonesia and between Spain and El Salvador, this paper examines to what extent these second- generation debt swaps differ from their contested predecessors. We argue that, while the Paris Declaration’s principles of policy and system alignment appear to have been fairly well implemented on education sector level in both case studies considered, it is mainly the macro-economic nature of such swaps that remains problematic. For debt relief to hold at least some promise of translating into an efficient and effective instrument of development, it should be large and comprehensive, as in the case of the HIPC Initiative and its successor the MDRI.

Financing the Clean Development Mechanism through debt-for-efficiency swaps? Case study evidence from a Uruguayan wind farm project

As one of Kyoto’s three flexibility mechanisms for reducing the cost of compliance, the Clean Development Mechanism (CDM) allows the issuance of Certified Emission Reduction (CER) credits from offset projects in non-Annex I countries. Whilst much attention has focused on the widespread use of the mechanism by China and India, the complex project cycle, and the lack of convincing baselines, little attention has been paid to the financing of CDM projects. In this paper we assess the extent to which CDM projects with public bodies should utilise debt swaps as a form of finance. The paper does this through analysing the use of a debt swap between Uruguay and Spain within a CDM wind farm project in Uruguay. The paper assesses this transaction according to a simple framework by which debt swaps can be evaluated: whether it delivers additional resources to the debtor country and/or debtor government budget; whether it delivers more resources for climate purposes; whether it has a sizeable effect on overall debt burdens (thereby creating ‘indirect’ benefits); and whether it adheres to the principles of alignment with government policy and systems (key elements within the new aid approach).

The pitfalls and potential of debt-for-nature swaps : a US-Indonesian case study

The vital role of forests in limiting the likelihood of dangerous climate change has precipitated renewed interest in debt-for-nature swaps. This article uses evidence on past debt-for-nature swaps and similar debt mechanisms to assess the recent second wave of debt swaps. It outlines five typical shortcomings of this form of financial transaction: that they often fail to deliver additional resources to the debtor country; often fail to deliver more resources for conservation/climate purposes; often have a negligible effect on overall debt burdens, and, as such, do not generate more ‘indirect’ benefits; and are often in conflict with the new aid delivery paradigm’s emphasis on alignment with government policy and systems. Our analysis is applied to a recent debt-for-nature swap initiative between the United States and Indonesia. We show that this case, which we consider as a litmus test for current swap practice, performs unevenly across the five shortcomings identified. On the one hand, the swap does not create additional resources for the Government of Indonesia, is too insignificant to create indirect (positive) economic effects, and appears at odds with the new aid delivery paradigm’s insistence on system alignment. On the other hand, the swap does not reduce Government of Indonesia resources, and is very much in line with current national policy. The extent to which the resources provided by the swap are additional to other donor support and reserved domestic budget lines for conservation goals is unclear. Whilst a second generation of debt-for-nature swaps should clearly be avoided, there is a need to debate broader ways of linking debt service repayments to forest conservation.

Empirical Evidence on the New International Aid Architecture

We conduct an empirical study on how 22 donors allocate their bilateral aid among 147 recipient countries over the 1970-2004 period to investigate whether recent changes in the international aid architecture-at the international and country level-have led to changes in donor behavior. We find that after the fall of the Berlin Wall and especially in the late nineties, bilateral aid responds more to economic needs and the quality of a country?s policy and institutional environment and less to debt, size and colonial and political linkages. We also find more selectivity by donors when a country uses a PRSP and passes the HIPC decision point. Importantly, PRSPs and HIPCs reduce the perverse effects of large bilateral and multilateral debt shares on aid flows, suggesting less defensive lending. Overall, it appears certain international aid architecture changes have led to more selectivity in aid allocations. The specific factors causing these changes remain unclear, however. And since there remain (large) differences among donors in selectivity that appear to relate to donors? own institutional environments, reforms will have to be multifaceted. --development aid,aid allocation,selectivity,debt relief,HIPC,PRSP,aid architecture