Essays on aid, growth and welfare

As from early 1960s, the question of whether aid works has been a central theme in development economics. The continued effort to analyse the effects of aid only now appears to be nearing consensus. A close examination of the literature suggests that there are certain aspects that are critical to this strand of studies that have not been fully addressed. In this thesis, we make a contribution by throwing light on three such issues that relate to the macroeconomic effectiveness of aid. Aid does not have a direct effect on growth; it operates via transmission mechanisms. Their role has not been given due consideration in the empirical literature. Our first objective is to revisit the question of aid effectiveness while taking into account the important effects through these mechanisms. Using generated regressors, we purge aid effect on these various mediators and obtain a coefficient on aid that gives a measure of the total effect aid has on growth. Our results consistently show that aid has had a positive effect on growth, largely through aid-financed investment and that Africa's poor growth record should not be attributed to aid ineffectiveness. Our second objective relates to the non-linear aspects that would seem to characterise the aid-growth link. This has consistently been represented by an 'aid squared' term and recently been referred to as the aid Laffer effect as proposed by Lensink and White (2001). Using a threshold model, we directly test the assumptions underlying this hypothesis. Contrary to an aid Laffer curve, we find that aid becomes effective beyond a certain critical level and human capital enhances its effects at higher aid levels. Hence, we find no evidence of diminishing returns in aid. Although, marginal impact of aid on growth does become weaker as human capital exceeds some high level. Overall, it seems that an 'aid squared' term is not an appropriate representation of the non-linearity in aid-growth link. Finally, we contribute to the limited literature on aid and welfare of the poor. Our findings consistently show that aid is associated with increases in welfare indicators. We highlight the role of pro-poor public spending as the channel through which aid improves welfare. These indirect effects are captured using residual generated regressors. Quantile regression estimates suggest that aid effects on human development vary across the welfare distribution; effects are more significant in economies located at the lower end of this distribution. Finally, we find that improving welfare may just be another way to promote growth in developing countries

Essays on aid, growth and welfare

As from early 1960s, the question of whether aid works has been a central theme in development economics. The continued effort to analyse the effects of aid only now appears to be nearing consensus. A close examination of the literature suggests that there are certain aspects that are critical to this strand of studies that have not been fully addressed. In this thesis, we make a contribution by throwing light on three such issues that relate to the macroeconomic effectiveness of aid. Aid does not have a direct effect on growth; it operates via transmission mechanisms. Their role has not been given due consideration in the empirical literature. Our first objective is to revisit the question of aid effectiveness while taking into account the important effects through these mechanisms. Using generated regressors, we purge aid effect on these various mediators and obtain a coefficient on aid that gives a measure of the total effect aid has on growth. Our results consistently show that aid has had a positive effect on growth, largely through aid-financed investment and that Africa's poor growth record should not be attributed to aid ineffectiveness. Our second objective relates to the non-linear aspects that would seem to characterise the aid-growth link. This has consistently been represented by an 'aid squared' term and recently been referred to as the aid Laffer effect as proposed by Lensink and White (2001). Using a threshold model, we directly test the assumptions underlying this hypothesis. Contrary to an aid Laffer curve, we find that aid becomes effective beyond a certain critical level and human capital enhances its effects at higher aid levels. Hence, we find no evidence of diminishing returns in aid. Although, marginal impact of aid on growth does become weaker as human capital exceeds some high level. Overall, it seems that an 'aid squared' term is not an appropriate representation of the non-linearity in aid-growth link. Finally, we contribute to the limited literature on aid and welfare of the poor. Our findings consistently show that aid is associated with increases in welfare indicators. We highlight the role of pro-poor public spending as the channel through which aid improves welfare. These indirect effects are captured using residual generated regressors. Quantile regression estimates suggest that aid effects on human development vary across the welfare distribution; effects are more significant in economies located at the lower end of this distribution. Finally, we find that improving welfare may just be another way to promote growth in developing countries

Aid and government fiscal behavior: assessing recent evidence

This paper reviews evidence published in the last 10 years that has added to our understanding of the effects of aid on government spending and tax effort in recipient countries, with a discussion of when (general) budget support is a fiscally efficient aid modality. Three generalizations are permitted by the evidence: aid finances government spending; the extent to which aid is fungible is over-stated and even where it is fungible this does not appear to make the aid less effective; and there is no systematic effect of aid on tax effort. Beyond these conclusions effects are country-specific

The Aid paradigm for poverty reduction: Does it make sense?

YesWhilst thinking on economic policy for development has undergone many shifts with the perceived weak results of earlier adjustment reforms a new donor consensus has emerged based around the central themes of economic growth, good governance and social development. This paper examines the logic behind this new Aid paradigm and discusses the empirical evidence to support it. A nuanced story is revealed with country circumstances playing a critical role and particular interventions varying in impact across countries. For example, growth does not always lead to gains for the poor that match the national average; public expenditure needs to be targeted to achieve social development but effective targeting is difficult; governance reform may be critical but there is no simple governance blueprint and the corruption-growth association need not always be negative

Debt Relief Effectiveness and Institution Building

The history of debt relief is now particularly long, the associated costs are soaring and the outcomes are at least uncertain. This paper reviews and provides new evidence on the effects of recent debt relief programs on different macroeconomic indicators in developing countries, focusing on the Highly Indebted Poor Countries. Besides, the relationship between debt relief and institutional change is investigated to assess whether donors are moving towards and ex-post governance conditionality. Results show that debt relief is only weakly associated with subsequent improvements in economic performance but it is correlated with increasing domestic debt in HIPCs, undermining the positive achievements in reducing external debt service. Finally, there is evidence that donors are moving towards a more sensible allocation of debt forgiveness, rewarding countries with better policies and institutions