The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Timeseries Analysis

This study econometrically evaluates the short-run impact of aid in small developing countries (SDCs) by applying a VAR model to study aid's impact on 'absorption' (increasing import demand) and 'spending' (increased domestic demand) across countries. Whilst our approach allows parameters to vary across countries, the focus is on average country effects and differential effects within certain subgroups of countries. In particular, we find substantial differences between 'aid-dependent' SDCs and other SDCs which are more dependent on mineral resources and financial services. In the latter group, aid seems to be neither absorbed nor spent in any systematic fashion. But in the aid-dependent SDCs, aid receipts seem to be used more in the textbook 'absorb and spend' fashion.foreign aid, small developing countries, macroeconomic adjustment, absorption, spending, VAR models, panel data

On the Causal Links between FDI and Growth in Developing Countries

We analyse the Granger-causal relationships between foreign direct investment (FDI) and GDP in a sample of 31 developing countries covering the period 1970-2000. Using estimators for heterogeneous panel data we find bi-directional causality between the FDI/GDP ratio and the level of GDP. FDI is found to have a lasting impact on the level of GDP, while GDP has no long run impact on the FDI/GDP ratio. In that sense FDI causes growth. Furthermore, in a model for GDP and FDI as a fraction of gross capital formation (GCF) we also find long run effects of shifts in the mean level of FDI/GCF. We interpret this finding as evidence in favour of the hypotheses that FDI has an impact on GDP via knowledge transfers and adoption of new technology.economic growth; foreign direct investment; Granger causality; panel data

The Rise in Danish Unemployment: Reallocation or Mismatch?

Two key relations in theoretical work on labor market flows are analyzed; the hiring function and the uv-curve. The relations are identified in a cointegrated VAR-model framework. The system comprising unemployment, vacancies and hirings is driven by a stochastic trend in the vacancies, corresponding to the status of vacancies as the driving force in models of labor market flows. The drift in the relations is modeled by smooth transition functions and is identified as increased mismatch problems in the Danish labor market as opposed to increased structural change.hiring function; UV-curve; cointegrated VAR-Model; smooth transition functions; mismatch

The short-run macroeconomic impact of foreign aid to small states: An agnostic time series analysis

"We herein investigate the short-run macroeconomic impact of aid in small developing countries (SDCs) by using a vector auto regression (VAR) model to study the impact of aid on net import (absorption) and domestic demand (spending). We focus on average country effects within two country sub-groups, and find substantial differences between ‘aid-dependent' SDCs and other SDCs that are more dependent on natural resources, tourism or financial services. In aid-dependent SDCs, aid absorption more or less equals spending, although only half of the aid flow is absorbed and spent. In the non-aid-dependent group, aid does not seem to be absorbed or spent in any systematic fashion." from authors' abstractForeign aid, Small states, Vector auto regression, Mean group estimator, Macroeconomic impacts, Development strategies, Public investment,

The Rise in Danish Unemployment: Reallocation or Mismatch?

The two main competing theories for the outward shift in the uv-curve are investigated: Increased separations from employment at a given employment level (reallocation) and decreased levels of hires, given unemployment and vacancies (mismatch). Shifts in the uv-curve and the hiring function are modelled by smooth transition functions, and the hypothesis of analogous shifts in the two curves is tested and accepted. This is interpreted as evidence in favor of the mismatch hypotheses.

The Return to Foreign Aid

This paper investigates the marginal productivity of investment in the world’s poorest economies. The aim is to estimate the return on investments financed by foreign aid as well as by domestic resource mobilization, using crosscountry aggregate data. In practice the return on both investment categories can be expected to vary considerably across countries and time. As a consequence we develop a correlated random coefficients approach to the issue at hand, which allows us to estimate the average aggregate rate of return on “aid investments” and “domestic investments”. Across a wide array of estimators our principal finding is remarkably robust; the average aggregate gross return on “aid investments” falls in a 20-30 percent range, roughly the same as the return on investments funded by other sources than aid. This finding is well in accord with micro estimates of the economic return to aid.productivity, foreign aid, random coefficients, panel data

Evaluating Aid Effectiveness in the Aggregate: A critical assessment of the evidence

The purpose of the present evaluation study is to discuss the empirical studies that attempt to estimate the impact of foreign aid on economic growth. The study draws on a previous evaluation study (Dalgaard and Hansen, 2009), which introduces the general econometric methodology involved in making assessments about the aggregate impact of aid. In order to fully benefit from the discussion below it is therefore advisable for readers without prior knowledge of econometrics to review the material discussed in Dalgaard and Hansen (2009). The present study provides insights into the following questions 1. What are the central mechanisms linking aid to growth? 2. How much should one expect from aid a priori? 3. What are the best available estimates of the impact from total aid on economic growth in income per capita? 4. Does aid modality matter?Economic growth; foreign aid

Evaluating Aid Effectiveness in the Aggregate: Methodological Issues

The purpose of the present Evaluation Study is to discuss the methodological problems researchers are facing in gauging the impact of aid on economic growth. The discussion is nontechnical and aimed at an audience without much prior knowledge in the fields of macroeconomics and econometrics. The paper provides insights into the following questions: 1. Why do economists view “aid effectiveness” as synonymous to asking whether aid increases growth in income per capita? 2. Why is it difficult to determine the macroeconomic impact of foreign aid on economic growth? 3. How is it, in principle, possible to solve the difficulties present in evaluating aggregate aid effectiveness?Economic growth; foreign aid; instrumental variable regression

Supporting local innovation for rural development: Analysis and review of five innovation support funds

In continents and countries such as Africa and India, huge agricultural areas are "de-facto" organic. More formalised - and knowledge intense - methods of organic agriculture has proved potential help farmers achieve better development returns from farming organic. While not commonly referred to (formally certified) as "organic", this huge agricultural sector mainly depend on farmer-knowledge intensive and local innovation systems very much of the same kind that served development of organic agriculture in the west, before agricultural universities and subsequently governments took interest in participating in developing "organic" agriculture. The aim of this study is to follow up on a World Bank workshop on innovation systems at the community level. Most of the knowledge and innovation referred to in the report relates to agriculture. By resolution, this workshop recommended that a ‘review of existing innovation support funds and outline of a global mechanism to foster community level innovations’ should be undertaken. The study is also, in part, a response to a recent report from the World Bank’s Indigenous Knowledge for Development Program, which calls for the establishment of an “innovation fund to promote successful IK practices” (Gorjestani, N., in WB 2004; 45-53). Th is desk study reviews fi ve innovation support funds (ISFs) or funding concepts: the Indian ‘National Innovation Fund’ (NIF) and its associated web of institutions; the GTZ-funded ‘Small-Scale Project Fund’ (SSPF); the NGO concept ‘Promoting Local Innovation in ecologically oriented agriculture and NRM’ (PROLINNOVA); the FAO’s project, ‘Promoting Farmer Innovation-Farmer Field Schools’ (PFI-FFS); and the ‘Local Agricultural Research Committee’ (CIAL) in Latin America. Local innovations are broadly perceived as constituting a major under-utilized potential for development and rural poverty reduction, and ISFs as contributing to realize this potential. Local innovators continue to experiment and generated knowledge within a broad spectrum of areas, including improved mechanical tools for agriculture, natural resource management, medicinal and agricultural practices, and innovative ways of organizing and doing business. Th e signifi cance of local innovators as a source of knowledge and well-adapted solutions is high among the poorer sections of rural society, many of whom cannot aff ord, nor have access to, relevant advisory services. Th ere is growing recognition that a whole range of diff erent actors and organizations are required to stimulate widespread local technological development. New products and processes are brought into local economic and social use through networks of organizations, which are often referred to in the abstract as the innovation system. Th e key challenge is not perceived in terms of devising new technologies, e.g. doing diff erent things, but in bringing about changes in how the innovation system works, e.g. doing things diff diffff erently (Phila 2005). DIIS REPORT 2007:4 6 Our comparative analysis of the fi ve reviews listed above draws twelve preliminary conclusions: (i) NIF is globally the largest and most advanced ISF. However, although the other four ISFs are more limited in scope and focus, they can all contribute valuable experiences, complementary to those of NIF. In our assessment, the eff ectiveness of investing in innovation support could be enhanced if existing complementary experiences were exchanged and acted on in a systematic manner. (ii) ISFs understand innovation as a matter of both processes and products, the latter varying from hard mechanical implements to soft institutional innovations. ISFs support both innovators and their links with public institutions and private entrepreneurs, and groups of rural producers, as platforms for innovations and as their links with innovators. It is our assessment that all ISFs could benefi t from a more balanced mix of the two areas of innovation support. (iii) ISFs’ understandings of who the innovators are varies. NIF celebrates the qualities of individual, small-scale entrepreneurs with a proven record of being innovative, while the remaining ISFs place their eff orts in facilitating poor rural producers and users of innovations to learn to become ‘researchers’ in their own right. It is our assessment that supporting both types of innovator is likely to increase the development outcomes of ISFs. (iv) A general lesson learned by all ISFs is that innovations have to be understood in their context. ISFs currently diff erentiate between innovations on the basis of the types of issues they are concerned with (e.g. soil and water conservation, biological pest management, etc.). It is our assessment that it would be useful if the ISFs could instead distinguish between innovations in relation to (i) the relevance of formal property rights; (ii) public/private goods; and (iii) market/non-market value. (v) When using a ‘learning selection’ analytical framework for rural innovations for development, the focus shifts away from simply understanding innovators as inventors and rural producers as the users of innovations towards a focus on how innovations are continuously improved upon through interaction between the various actors. In our assessment, the facilitation of cycles of ‘ learning selection’ involving innovators, entrepreneurs and innovative adopters is a potential area of activity for ISFs that could contribute to scaling out use and the commercialization of rural innovations. DIIS REPORT 2007:4 7 (vi) Understanding capacity development as ‘the ability of an organization to produce appropriate outputs (e.g. services and products) helps clarify the aim of capacity development eff orts in these ISFs. ISF-supported eff orts are centered on the one hand on building eff ective mechanisms for identifying, documenting, vetting and promoting innovations, and on the other hand on ensuring organizational and fi nancial sustainability. (vii) Th e ISF funds reviewed here have a decentralized management structure linked together by a central management unit or committee. Th e Indian NIF has the most formalized and well-established governance structure, including a national Governing Board that coordinates activities among the web of independent organizations, each with diff erent functions and foci. Coordination of activities is less visible in the case of CIAL and PFI-FFS, as most management decisions in these organizations are taken at the farmer-group level and at the district-level networks of these groups. Th e PROLINNOVA concept provides a refreshing mix of centralized and decentralized decision-making management. (viii) None of these ISFs have a comprehensive system for monitoring outcomes and assessing the impact of support activities. Since none of the M&E systems diff erentiates between diff erent social categories, one potential development impact of ISF activities has not been documented. ISF documents are also unclear in their understandings of the social and economic mechanisms through which support for local innovations result in improved levels of well-being for poor people. (ix) Th e review reveals a diverse picture of Innovation Scouting, from none or implied (PROLINNOVA,) via criteria-based (SSPF), the village walks and student scouts of the NIF, reliance on grassroots “champions” and/or use of extension workers (FFS), to the structured group innovation process encoded in the CIALs. Th e use by NIF of students who return to their villages during their vacations to scout for innovations seems to be a successful approach that may be replicable in other areas where university students come from rural areas. Th e availability of comprehensive standardized forms and criteria that the students can easily apply has contributed to the success of this approach. An unintended side eff ect has been changes in student’s own attitudes to rural development. (x) Most of the funds reviewed made few if any attempts to support any genuine commercialization of local innovations. Th e exception is NIF, which we found to be more advanced in this sense. NIF includes both formal and informal sector DIIS REPORT 2007:4 8 commercialization. While primarily focusing on innovations of a public-good nature with a view to informal commercialization or information-sharing, NIF has developed a proven capacity to work with innovations of a rival good or excludable nature, in other words, those with the potential for commercialization based on standard or sui-generis IPRs. Th e other funds focus mostly (CIAL) or almost exclusively (FFS) on non-excludable and non-rival goods. In the latter cases, most or all the innovations they support are likely to be of a public-good nature. (xi) Th ree complementary forms of innovation vetting are practiced by the IFSs, each with their merits. One of the funds reviewed rely on two separate innovation “review” committees, one “scientifi c”, and one by peers among innovators (NIF), while another used joint experiments involving both external facilitators and researchers (CIAL). Vetting by potential users (e.g. rural producers) is widely practiced in PFI-FFS. (xii) Th e approach to learning varies within the ISFs, from the highly complex and elaborate learning programmed for at all levels, through a wide array of instruments and forums (NIF), to a far more specifi c and scoped adult or joint learning model (CIAL, FFS), to the rather more amorphous “collective learning” envisioned by the PROLINNOVA concept. A global innovation facility (GIF) could play a role in compiling existing documentation of experience, initiating cross-country studies, and assisting in ensuring that these experiences are made available and exchanged in a systematic manner among the existing ISFs. Th e mission of such a GIF could be to enhance the effectiveness of existing ISFs and the global expansion of activities by facilitating institutional learning, the exchange of experience between existing ISFs and the provision of technical assistance

SME Growth and Survival in Vietnam: Did Direct Government Support Matter?

In this paper we provide evidence on the survival and growth of small and medium-sized enterprises (SMEs) in Vietnam relying on three partly overlapping enterprise surveys sampled during the period 1990-2002. Our empirical results indicate that classical determinants of performance including firm age, firm size, location, ownership, degree of capital intensive production and the type of activity are also important in Vietnam. In addition to the traditional indicators we analyze the effect of government support. Government credit assistance during start-up contributed significantly to the growth of Vietnamese SMEs in the late 1990s, but the importance of this kind of support may be diminishing as new firms do not seem to benefit from this form of support. In contrast, the importance of legal advice appears to be increasing.SME dynamics; government policy; Vietnam