When is foreign aid policy credible : aid dependence and conditionality

The author studies foreign aid policy within a principal-agent framework. He shows that one reason for foreign aid's poor overall record may be a moral hazard problem that shapes the aid recipient s incentive to undertake structural reform. The model's basic prediction is a two-way relationship: Disbursements of foreign aid are guided (in part) by the needs of the poor. Anticipating this, recipients have little incentive to improve the welfare of the poor. Preliminary econometric work shows that the data support this hypothesis. In principle, conditionality could partly solve this problem, but only if the donor can make a binding commitment to increase disbursements in good relative to bad states. Without such a commitment technology, aid disbursements remain guided by the needs of the poor and recipient countries maintain a low effort to reduce poverty. Contrary to the conventional wisdom found in the aid literature, the author shows that the welfare of all parties might be improved by using tied project aid or by delegating part of the aid budget to an (international) agency with less aversion to poverty.Development Economics&Aid Effectiveness,School Health,Economic Adjustment and Lending,Environmental Economics&Policies,Economic Theory&Research

Foreign aid and rent-seeking

To address the relationship between concessional assistance, corruption, and other types of rent-seeking activities, the author provides a simple game-theoretic rent-seeking model. Insights with interesting implications emerge from the analysis: 1) An increase in government revenue (from windfalls, for example, or from increased foreign aid) does not necessarily lead to the provision of more public goods and in certain circumstances may reduce it. 2) The mere expectation of aid may suffice to increase rent-dissipation and reduce productive public spending. But if the donor community can enter into a binding policy commitment, this result may be reversed. The author provides some preliminary empirical evidence in support of the hypothesis that windfalls and foreign aid, in countries suffering from a divided policy process, are on average associated with more extensive corruption. He finds no evidence that donors systematically allocate aid to countries with less corruption. The results accords with recent empirical findings that aid is more effective, the greater the effort to direct it to good performers. But such a regime shift may involve an aid policy that in the short run provides more assistance to countries in less need and less aid to those in most need. Enforcing such a regime shift might be difficult.Environmental Economics&Policies,Development Economics&Aid Effectiveness,Decentralization,Gender and Development,Economic Theory&Research,Economic Theory&Research,Environmental Economics&Policies,Governance Indicators,Inequality,Development Economics&Aid Effectiveness

Who must pay bribes and how much? Evidence from a cross-section of firms

The author exploits a unique data set on corruption containing information about estimated bribe payments by Ugandan firms. To guide the empirical analysis, he develops a simple rent-extortion model, which yields predictions on both the incidence of bribery, and the amount paid. Both predictions are consistent with the data. Firms typically have to pay bribes when dealing with public officials whose actions directly affect the firms'business operations. And the amount paid in bribes is not a fixed sum for a set of public services, but depends on the firm's ability to pay. Controlling for other potential explanations of the relationship between"ability to pay"and equilibrium graft, the author shows that the more a firm can pay, the more it has to pay.Economic Theory&Research,Corruption&Anitcorruption Law,Public Sector Corruption&Anticorruption Measures,Environmental Economics&Policies,Social Policy

Who Must Pay Bribes and How Much? Evidence from a cross-section of firms

This paper uses an unique data set on corruption containing quantitative information on estimated bribe payments of Ugandan firms. The data has two striking features; not all firms report they need to pay bribes; and, there is a considerable variation in reported graft across firms facing similar institutions/policies. To explain these patterns we construct a simple bargaining model. The model yields predictions on both the incidence and the level of graft. Consistent with the model we find that variation in policies/regulations (across industries) explain the incidence of corruption, while variation in profitability and technology choice explain the variation in bribes for the group of bribe paying firms. These findings suggest that public officials act as price (bribe) discriminators, and that prices of public services are endogenously determined in order to extract bribes.TBA

Explaining leakage of public funds

Using panel data from a unique survey of public primary schools in Uganda, The authors assess the degree of leakage of public funds in education. The survey data reveal that on average during 1991-95 schools received only 13 percent of the central government's allocation for the schools'nonwage expenditures. Most of the allocated funds were used by public officials for purposes unrelated to education or captured for private gain (leakage). The survey data also reveal large variations in leakage across schools. A small set of school-specific variables can explain a significant part of this variation. Specifically, the authors find that larger schools receive a larger share of the intended funds per student. Schools with children of wealthier parents also experience a lower degree of leakage, while schools with a higher share of unqualified teachers receive less. After addressing potential selection and measurement issues, the authors show that these school characteristics have a quantitatively large impact on the degree of leakage. The findings are consistent with the view that resource flows-and leakage-are endogenous to schools'sociopolitical endowment. Rather than being passive recipients of flows from government, schools use their bargaining power relative to other parts of government to secure greater shares of funding. Public resources are therefore not allocated according to the rules underlying the government's budget decisions, with obvious equity and efficiency implications. The survey findings had a direct impact on policy in Uganda. As evidence on the degree of leakage became public knowledge, the central government enacted a number of changes: it began publishing monthly transfers of public funds to the districts in newspapers, broadcasting them on radio, and requiring schools to post information on inflow of funds. An initial assessment of these reforms shows that the flow of funds improved dramatically, from 13 percent on average reaching schools in 1991-95 to around 90 percent in 1999. These improvements emphasize the role of information in mobilizing"voice"for better public expenditure outcomes.General Technology,Information Technology,Sustainable Land and Crop Management,Knowledge Economy,Telecommunications Infrastructure,National Governance,Health Monitoring&Evaluation,Teaching and Learning,Primary Education,Gender and Education

Working for God? Evidence form a Change in Financing of not-for-profit Health Care Providers in Uganda

What motivates religious not-for-profit health care providers? This paper uses a change in financing of not-for-profit health care providers in Uganda to test two theories of organizational behavior. We show that financial aid leads to more laboratory testing, lower user charges, and increased utilization. These findings are consistent with the view that religious not-for-profit providers are intrinsically motivated to serve (poor) people and that these preferences matter quantitatively.not-for-profit organizations; health care provision; organizational behavior; Uganda

Explaining Leakage of Public Funds

Public services, Education, Private gain, Leakage

How inadequate provision of public infrastructure and services affects private investment

Lack of private investment is a serious policy problem in many developing countries, especially in Africa. Despite recent structural reform and stabilization, the investment response to date has been mixed, even among the strongest reformers. The role of poor infrastructure and deficient public services has received little attention in the economic literature, where the effect of public spending and investment on growth is shown to be at best ambiguous. The authors use unique microeconomic evidence to show the effects of poor infrastructure services on private investment in Uganda. They find that poor public capital, proxied by an unreliable and inadequate power supply, significantly reduces productive private investment. Firms ca substitute for inadequate provision of public capital by investing in it themselves. This comes at a cost, however: the installation of less productive capital. These results have clear policy implications. Although macroeconomic reforms and stabilization are necessary conditions for sustained growth and private investment, without an accompanying improvement in the public sector's performance, the private supply response to macroeconomic policy reform is likely to remain limited.Economic Theory&Research,Banks&Banking Reform,Environmental Economics&Policies,International Terrorism&Counterterrorism,ICT Policy and Strategies

The power of information : evidence from a newspaper campaign to reduce capture

The authors exploit an unusual policy experiment to evaluate the effects of increased public access to information as a tool to reduce capture and corruption of public funds. In the late 1990s, the Ugandan government initiated a newspaper campaign to boost schools'and parents'ability to monitor local officials'handling of a large school-grant program. The results were striking: capture was reduced from 80 percent in 1995 to less than 20 percent in 2001. The authors use distance to the nearest newspaper outlet as an instrument for exposure to the campaign. Proximity to a newspaper outlet is positively correlated with the head teachers'knowledge about rules governing the grant program and the timing of releases of funds from the center, but uncorrelated with test scores of general ability. A strong (reduced-form) relationship exists between proximity to a newspaper outlet and reduction in capture of school funds since the newspaper campaign started. This pattern contrasts sharply with the outcomes in the five-year period prior to the campaign. Instrumenting for head teachers'knowledge about the grant program, the authors find that public access to information is a powerful deterrent to capture at the local level.Public Health Promotion,Teaching and Learning,ICT Policy and Strategies,Health Monitoring&Evaluation,Primary Education,Health Monitoring&Evaluation,Teaching and Learning,TF054599-PHRD-KYRGYZ REPUBLIC: WATER MANAGEMENT IMPROVEMENT PROJECT,Primary Education,ICT Policy and Strategies

Political Budget Cycles: A Review of Recent Developments

This paper provides a review of recent developments in the theory and evidence of political budget cycles. Specifically, we discuss three areas where significant progress has been made. First, new theoretical explanations (models) have been proposed where political budget cycles arise as the result of a moral hazard problem between the government and the electorate. Second, more sophisticated empirical methods, in particular, time series methods appropriate for dynamic panel data regressions, have been adopted in cross-country analyses. Last but not least, the focus of recent studies has shifted from industrialized countries to all (including developing) countries, and from the existence of political budget cycles to the magnitude and composition (revenue vs. spending) of these cycles.Political budget cycles, dynamic panel estimation, developing countries