FOREIGN AID ISSUES

International Relations/Trade,

Is Foreign Aid Beneficial for Sub-Saharan Africa? A Panel Data Analysis

Significant ambiguity surrounds the magnitude and sign of the effect of foreign aid on economic growth. Foreign aid can potentially augment scarce domestic capital to spur growth but foreign aid can also remove positive incentive to build wealth, stalling growth. This paper characterizes the effect of foreign aid on the growth of Sub-Saharan African countries after correcting endogeneity problems that plague the estimation. Foreign aid is found to be growth promoting given good governance and using fixed effects in a static panel framework. Data from twenty-one Sub-Saharan African countries spanning 1995-2003 was used in the estimation. The finding of a significant foreign aid-growth relationship is pertinent because it suggests that increased aid to Sub Saharan Africa is one way to achieve the UN’s Millennium goals. By lobbying for increased foreign aid, advocates are prescribing a necessary albeit insufficient medicine for Sub Saharan Africa’s economic problems.Food Security and Poverty,

Why Foreign Aid Fails

The main point of this paper is that foreign aid fails because the structure of its incentives resembles that of central planning. Aid is not only ineffective, it is arguably counterproductive. Contrary to business firms that are paid by those they are supposed to serve (customers), aid agencies are paid by tax payers of developed countries and not by those they serve. This inverse structure of incentives breaks the stream of pressure that exists on the commercial market. It also creates larger loopholes in the principle-agent relationship on each point along the chain of aid delivery. Both factors enhance corruption, moral hazard and negative selection. Instead of promoting development, aid extends the life of bad institutions and those in power. Proposals to reform foreign aid like aid privatization and aid conditionality do not change the existing structure of the incentives in aid delivery, and their implementation may just slightly improve aid efficacy. Larger improvement is not possible. For that reason, foreign aid will continue to be a waste of resources, probably serving some objectives different to those that are usually mentioned, like recipients development, poverty reduction and pain relief.Foreign development aid, Planning, The structure of incentives, Aid inefficiency, Reform of foreign aid.

Why Foreign Aid Fails

The main point of this paper is that foreign aid fails because the structure of its incentives resembles that of central planning. Aid is not only ineffective, it is arguably counterproductive. Contrary to business firms that are paid by those they are supposed to serve (customers), aid agencies are paid by tax payers of developed countries and not by those they serve. This inverse structure of incentives breaks the stream of pressure that exists on the commercial market. It also creates larger loopholes in the principle-agent relationship on each point along the chain of aid delivery. Both factors enhance corruption, moral hazard and negative selection. Instead of promoting development, aid extends the life of bad institutions and those in power. Proposals to reform foreign aid – like aid privatization and aid conditionality – do not change the existing structure of the incentives in aid delivery, and their implementation may just slightly improve aid efficacy. Larger improvement is not possible. For that reason, foreign aid will continue to be a waste of resources, probably serving some objectives different to those that are usually mentioned, like recipient’s development, poverty reduction and pain relief.

Conflict, Aid and Poverty: Cause, Effect and Prediction

Recent studies and reports suggest that foreign aid/intervention has been somewhat futile in eradicating conflict. In this study, we develop a simultaneous donor/recipient model of foreign aid and terrorism. Thereafter, we extend our theoretical propositions through a machine learning algorithm of inductive causation. We find that terrorism increases foreign aid, however foreign assistance is futile in mitigating terrorism. Additionally, socio-economic factors influence foreign aid given by the donors. But foreign assistance is unsuccessful in enhancing the livelihoods of the underprivileged. We conclude that foreign aid policies need to be more efficient.Food Security and Poverty, International Relations/Trade,

Foreign aid and growth

Burnside and Dollar (2000) (BD) ignite a policy debate by claiming that foreign aid works only in good policy environments. This result, however, has been criticized by a number of studies on numerous statistical grounds concluding that the BD result is too fragile. I revisit the aid-growth relationship using Bayesian Model Averaging techniques to account for uncertainty issues regarding model specification. I find that the data evidence does not support the claim that aid works only in good policy environments. My analysis also suggests that aid flows are not very effective in boosting growth regardless of the quality of the policy environment.

On the Simultaneity Problem in the Aid and Growth Debate

This paper shows that foreign aid has a signicant positive average effect on real per capita GPD growth if, and only if, the quantitatively large negative reverse causal effect of per capita GDP growth on foreign aid is adjusted for in the growth regression. Instrumental variables estimates yield that a 1 percentage point increase in GDP per capita growth decreased foreign aid by over 4 percent. Adjusting for this quantitatively large, negative reverse causal effect of economic growth on foreign aid yields that a 1 percent increase in foreign aid increased real per capita GDP growth by around 0.1 percentage points.aid allocation, aid effectiveness, economic growth, simultaneity

Foreign aid and export performance: a panel data analysis of developing countries

The effect of foreign aid on economic activity of a country can be dampened due to potentially adverse effects on exports through a real exchange rate appreciation. In this study we examine the long-term relationship between export performance and foreign aid in developing countries while accounting for other factors. The estimates of direct effect of foreign aid on exports are imprecise. However, the effect of the quadratic term of foreign aid on exports is negative and precise. This implies large amount of foreign aid does adversely affect export performance. The results are robust to the use of two different export performance measures and different sub-samples.Developing countries - Economic conditions ; Exports

Do Corrupt Governments Receive Less Foreign Aid?

Critics of foreign aid programs argue that these funds often support corrupt governments and inefficient bureaucracies. Supporters argue that foreign aid can be used to reward good governments. This paper documents that there is no evidence that less corrupt governments receive more foreign aid. On the contrary, according to some measures of corruption, more corrupt governments receive more aid. Also, we could not find any evidence that an increase in foreign aid reduces corruption. In summary, the answer to the question posed in the title is 'no.'

Testing the foreign aid-led growth hypothesis in West Africa

This paper assesses the foreign aid-led growth hypothesis in a panel of West African countries using panel cointegration techniques ( Pendroni Residual Cointegration Test, Error Correction Model, Johansen Fisher Panel Cointegration Test) and then on a country-by-country basis using time series cointegration techniques (Engle-Granger test, Error Correction Model , Johansen system cointegration test). The panel cointegration results indicate a long run relationship between aid and growth in the whole panel. For the individual countries, at least one test showed evidence of this long run relationship. Granger causality tests were done for the whole panel and then for each country individually to establish direction of causality between foreign aid and economic growth. There is evidence of unidirectional causality from foreign aid to economic growth, from economic growth to foreign aid and there are cases where both variables are independent. A simplified variation of the Chenery and Strout Two-Gap Model was estimated to test the impact of foreign aid and selected explanatory variables on economic growth in countries where aid was found to granger cause growth and this impact varied from country to country