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Abstract:
Thispapercontributes
to theempiricsof aid and growthbyinvestigataid modality
in explaining
Forthispurpose,
matters
itseffectiveness.
ingwhether
we includethefourmainaid modalities(projectaid,financial
programaid,technicalassistancegrants,and foodaid) as explanatory
variablesin an endogenous
and significantly
model.We findthatprojectaid affects
growth
positively
growth,
albeitwithdiminishing
returns.
Our resultsalso showthatfinancial
programaid
whiletheimpactsof technicalassistance
impactson growthnegatively,
generally
and foodaid are statistically
we findthatclimaterelated
Moreover,
insignificant.
conditions
influence
theeffect
ofprojectaid. JELno. C2, F3
Aid;growth;
Keywords:
dynamicpanelmethods
1 Introduction
The roleofforeign
aid in fostering
in
economicgrowthand development
countries
continues
to
a
makers
be
of
debate
poor
subject
amongpolicy
and researchers.
Thisdebatehas becomeimportant
in thelightofthedein meetingthe
the
international
velopment
challenges
community
facing
Millennium
the
Goals
ConferIndeed,
(MDGs).
Development
Monterrey
ence organizedby the UnitedNationsin 2002 was held to findwaysin
whichtheinternational
can addressthemeansand constraints
community
topoverty
reduction
and to stresstheroleoftheinternationally
agreeddeas
a
tool
to
measure
toward
these
The
velopment
goals
objectives.
progress
of
aid
has
been
the
Consensus
scalingup foreign
by Monterrey
highlighted
as one of theimportant
toolsto achievethenew development
financing
goals.
therearestillsomescepticisms
theeffectiveness
of
However,
regarding
aid. Indeed,thequestion"Does aid work?"(Cassen 1994) has led to little
Remark:Thanks to D. Roodman for sending the Stata codes used to compute some of the
regressions,and an anonymous refereefor constructivecomments. Please address correspondence to Eric Strobl,Departmentof Economics, Ecole Polytechnique,91128 Palaiseau
Cedex, France; e-mail: eric.strobl^shs.polytechnique.fr
2008 Kiel Institute
DOT: 10.1007/s10290-008-0150-3
348
349
350
Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?
351
352
Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?
353
354
and DollarSpecification
Table1: Burnside
(1)
Loginitialreal
GDP/capita
Assassination
Ethno-linguistic
x
fractionalisation
assassination
M2/GDP
Projectaid
Financialprogram
aid
Technical
assistance
Foodaid
Policy
Policyx project
aid
Policyx financial
aid
program
Policyx technical
assistance
Policyx foodaid
Constant
(2)
(3)
(4)
(5)
2.016
1.885
1.908
1.787
1.218
(1.75)* (2.87)*** (2.19)** (2.46)** (1.61)
-0.626
-0.580 -0.669
-0.672
-0.528
(1.29)
(1.34)
(1.30)
(1.46)
(0.98)
0.970
(1.10)
0.023
(0.95)
0.425
(4.10)***
-0.372
(1.68)*
-0.828
(1.99)*
0.169
(0.20)
0.643
0.881
0.837
1.002
(0.95)
(1.00)
(0.56)
(0.99)
0.021
0.023
0.017
0.030
(0.94)
(0.89)
(0.74)
(1.36)
0.366
0.388
0.429
0.406
(1.43) (4.02)*** (4.13)*** (3.89)***
-0.360
-2.087
-0.419 -0.401
(1.89)*
(1.64) (2.10)** (1.98)*
-0.751
-0.768
-1.560 -1.012
(1.58) (2.40)**
(1.91)* (1.72)*
0.117
(0.12)
0.125
(0.17)
0.124
(0.11)
-6.256
(1.58)
(6)
0.064
(0.04)
-0.963
(2.09)**
1.581
(1.65)
0.042
(1.69)*
0.322
(0.25)
-2.129
(1.05)
0.456
(0.12)
-3.148
(0.66)
0.635
0.617
0.705
0.739
1.043
0.628
(2.68)*** (2.17)** (2.87)*** (2.33)** (3.75)*** (1.89)*
-0.005
-0.003
(0.23)
(0.02)
-0.183
-0.178
(1.44)
(0.83)
-0.076
0.164
(0.81)
(0.41)
-0.656
-0.369
(1.72)*
(0.77)
-7.895
3.317
-4.893 -10.030 -4.841
7.617
(0.54)
(1.43)
(0.62)
(0.99)
(0.45)
(0.65)
Observations
Numberofcountries
414
69
414
69
414
69
414
69
414
69
414
69
^ow^T
forAR(2) (p-value)
Hansentest(p-value)
0-637
0.663
0.978
0.707
0.704
0.753
0.743
0.883
0.892
0.894
0.895
1.000
Table1 presents
resultsusingthe
to ourestimated
coefficients,
Turning
Withrespectto ourpolicyindex
Burnsideand Dollar(2000) specification.
it is worthpointingout thatit is constructed
usinga similarapproachas
in Burnsideand Dollar (2000),althoughthederivation
ofourestimates
is
Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?
355
done using the dynamicpanel technique (and not the OLS technique).12
Turningnow to our results,it can be seen fromcolumn (1) of Table 1
The impacts of
thatprojectaid affectsgrowthpositivelyand significantly.
financialprogramaid and technicalassistanceappear to be negativebut
only significantat the 10 percentlevel. Food aid does not appear to exert
any statistically
significanteffecton growth.The resultalso indicatesthat
the policy environmentof the recipientcountry(policy) exertsa positive
significanteffecton growth.In column (2) throughto column (5), we
interactour policyvariableeach time with one of the aid variables.None
of the interactionterms are found to be statisticallysignificant,except
the food aid-policy interactionterm which is negativeand significantat
the 10 percentlevel. Moreover,financialprogramaid appears, in general,
to exert a negativeeffecton growth.In column (6) we include all the
different
interactionterms.Again none of themis found to be statistically
significant.
Table 2 reportsthe resultsrelatedto the Hansen and Tarp (2001) specification.One should recall that the storyof the study by Hansen and
Tarp (2001) is thataid increasesgrowthon averagebut with diminishing
returns.In column (1) throughto column (4) we thus enteredeach aid
categoryin nonlinearform.What emergesfromthese regressionsis that,
as withthe previous specification,the effectof project aid is positiveand
The impactof financialprogramaid is negativebut
statistically
significant.
in
one
only significant
regression.As faras diminishingreturnsare concernedresultsin column (1) suggestthatprojectaid increasesgrowthwith
diminishingreturns.In column (2) wherefinancialprogramaid is entered
in nonlinearform,we findno evidence of diminishingreturns,which is
consistentwith the factfinancialprogramaid affectsgrowthnegatively.13
Resultsin column (3) indicatethatalthoughtechnicalassistancedoes not
exertanysignificant
effecton growth,highlevelsof it can be detrimentalto
therecipienteconomy.Resultsin column (4) suggestthatfood aid does not
lead to diminishingreturns.In the finalcolumn of Table 2 we enterall the
aid categoriesin nonlinearform.Againtheonlytypeof aid associatedwith
diminishingreturnsis projectaid.
12 The
356
Table2: HansenandTarpSpecification
(1)
(2)
(3)
(4)
(5)
-0.088
(0.87)
-4.816
(1.80)*
-3.273
(1.11)
1.667
(2.66)***
-0.400
(1.12)
0.925
(1.46)
0.659
(2.15)**
-0.552
(2.37)**
0.282
(0.54)
-0.028
(0.36)
-5.558
(2.24)**
-3.233
(1.48)
2.595
(3.89)***
-0.477
(1.43)
1.150
(1.72)*
0.062
(0.31)
-0.217
(0.30)
0.221
(0.40)
-0.100
(1.14)
-3.701
(1.56)
-4.503
(2.05)**
1.168
(1.61)
-0.580
(1.74)*
1.230
(1.68)*
0.299
(2.84)***
-0.419
(1.58)
0.310
(0.21)
0.004
(0.04)
-0.389
(0.10)
4.287
(1.43)
2.340
(3.61)***
-0.513
(1.17)
0.841
(1.15)
0.074
(0.12)
-0.514
(1.33)
-0.062
(0.05)
-0.119
(1.56)
-6.405
(2.13)**
-3.908
(1.25)
1.073
(1.54)
-0.540
(1.43)
1.021
(1.48)
1.033
(4.43)***
-1.627
(2.77)***
-1.298
(1.08)
(Financialprogramaid)2
-0.022
(3.63)***
-0.361
(1.54)
0.010
(1.84)*
-
(Financialprogramaid)
(Financialprogramaid)2
(Technicalassistance)2
-0.000
(0.00)
0.155
(0.36)
-0.038
(0.82)
-
(Technicalassistance)
A (Technicalassistance)2
(Food aid)2
A(Foodaid)
A(Food aid)2
Foodaid
0.040
(0.09)
(Projectaid)2
(Projectaid)
A(Projectaid)2
Observations
Numberof countries
AT
Hansen test(p-value)
0.379
(0.68)
1.045
(1.14)
2.257
(1.42)
0.377
(0.30)
0.064
(0.15)
-1.374
(0.57)
-0.085
(0.16)
-0.029
(5.72)***
-0.226
(1.22)
0.009
(2.40)**
0.122
(1.89)*
0.363
(0.75)
-0.025
(0.47)
0.072
(0.74)
-0.288
(0.39)
0.026
(0.45)
0.012
(0.06)
-2.172
(1.53)
0.151
(0.90)
-0.026
(0.18)
-3.394
(2.66)***
0.192
(2.10)**
350
75
350
75
350
75
350
75
350
75
0.236
0.172
0.543
0.419
0.945
357
we turnour attention
to theDaalgardetal. (2004) specificaFinally,
in Table3. Lookingthroughcolumn(1) to
tion.Resultsare summarized
thatprojectaid affects
column(5) it can be seenthatthefinding
growth
and significantly
is confirmed.
The impactappearsto be even
positively
effect
inthisspecification.
Theevidencealsopointstothenegative
stronger
this
is
on
offinancial
aid
However,
negativeimpact only
growth.
program
aid (technicalassisat the 10 percentlevel.Againnonfinancial
significant
tance,and foodaid) does notappearto affect
growth.We nextcheckthe
outsidethetropics.In
ofwhether
aid worksbetterin countries
hypothesis
aid
with
the
column(1) ofTable3 we interact
tropicalareafraction
project
areathatis inthetropics).
variable(whichmeasurestheshareofa country's
and statically
The coefficient
oftheinteraction
termis negative
significant.
In columns(2)-(4), we repeatthesameexerciseforfinancial
programaid,
The resultsshowthecoeftechnical
and foodaid,respectively.
assistance,
forfinancial
ficients
termto be negativeand significant
oftheinteraction
whilstthatoffoodaid is onlysignifiassistance
programaid and technical
in column(5) wherewe includeall
cantat the 10 percentlevel.However,
theinteraction
termsonlytheprojectaid x tropicalis statistically
significant,albeitat the10 percentlevel.In termsoftotalimpactofthedifferent
in thetropicsitcan be seenthatourresultsare
ofaid on growth
categories
withthefindings
consistent
ofDaalgardetal. (2004),i.e.,theimpactofaid
in thetropicsis notstatistically
on growth
significant.
effecton growth
The findingthataid does not bear any significant
it
in thetropicscould be attributed
to manyfactors.More importantly,
couldbe thatthesecountries
needmoreaid giventheirspecificcharacteristics.As an additionalexercisewe attemptto investigate
thispossibility
in
time
similar
as
Table
3
but
this
by re-running
regressions
interacting
thetropicalvariablewiththesquareoftheaid categories
(whichwe use as
a proxyforhighlevelsofaid). The resultsaresummarized
in Table4. As it
canbe seen,theeffect
remainsstrongthroughout
ofprojectaid on growth
columns( 1)-(5). Although
oftheinteraction
term
theestimated
coefficient
withprojectaid remainsnegative
ithasfallenin magnitude.
andsignificant
The totalimpactof projectaid on growthin thetropicsis now positive
and statistically
Thiscouldimplythatdonorsmightneedto
significant.14
increaseaid levelsforcountries
inthetropicsgiventheirspecific
characteristicsin orderto increaseitseffectiveness.
14 We also
experimentedwith aid (components)3, 2 timesaid (components) and 3 times
aid as proxies forhigh aid levels with similar results.
358
Table3: Dalgaard,
HansenandTarpSpecification
Log initialrealGDP/capita
Budgetsurplus
Log(l+inflation)
Sachs-Warner
Projectaid
Financialprogramaid
Technicalassistance
Food aid
Projectaid x tropical
Financialprogramaid x
tropical
Technicalassistancex
tropical
Food aid x tropical
Constant
Totalimpactof projectaid in thetropics
Totalimpactof financialprogramaid
in thetropics
Totalimpactof technicalassistancein
thetropics
Totalimpactof foodaid in thetropics
Observations
Numberof countries
Arrelano-Bond
testforAR(1) (p-value)
Arrelano-Bond
testforAR(2) (p-value)
Hansentest(p-value)
(1)
(2)
(3)
(4)
(5)
0.218
(0.09)
17.126
(2.28)**
-0.572
(0.26)
2.325
(4.14)***
0.560
(4.97)***
-0.327
(1.82)*
0.157
(0.45)
0.375
(0.50)
-0.594
(2.41)**
-
0.630
(0.20)
13.008
(1.60)
-0.211
(0.08)
2.357
(4.32)***
0.318
(2.72)***
0.288
(0.76)
-0.366
(0.94)
-0.379
(0.57)
-
0.794
(0.27)
11.822
(1.23)
-0.056
(0.02)
2.204
(3.34)***
0.341
(2.19)**
-0.374
(1.69)*
2.323
(1.67)*
-0.397
(0.57)
1.982
(1.11)
18.696
(1.86)*
1.081
(0.60)
2.280
(4.14)***
0.363
(3.15)***
-0.423
(2.28)**
-0.428
(1.32)
4.604
(1.85)*
0.542
(0.34)
23.687
(2.14)**
-0.242
(0.14)
2.069
(3.09)***
0.573
(5.01)***
0.091
(0.30)
1.207
(0.61)
-0.343
(0.09)
-0.463
(1.80)*
-0.351
(1.01)
-1.465
(0.67)
0.904
(0.21)
-0.950
(2.48)**
-
3.651
(0.14)
-0.034
(0.18)
-
-2.888
(2.07)**
-5.185
(1.91)*
-0.950
(0.03)
-
-3.095
(0.09)
-
-16.400
(0.77)
-
-0.662
(2.27)**
-
-0.665
(1.25)
425
71
0.022
0.059
0.236
425
71
0.05
0.223
0.172
-0.580
(0.80)
0.265
(0.01)
0.110
(0.46)
-0.260
(0.99)
-0.258
(0.55)
0.561
(0.69)
425
71
0.018
0.359
0.419
425
71
0.043
0.310
0.945
425
71
0.001
0.179
0.543
Note: Robust t-statisticsin parentheses;*, **, *** denote significanceat the 10, 5, and 1 percentlevel,respectively.
359
Log initialrealGDP/capita
Budgetsurplus
Log(l+inflation)
Sachs-Warner
Projectaid
Financialprogramaid
Technicalassistance
Food aid
Projectaid2x tropical
Financialprogramaid2x
tropical
x
Technicalassistance2
tropical
Food aid2x tropical
(1)
(2)
(3)
(4)
(5)
3.486
(1.51)
24.713
(1.95)*
1.628
(0.65)
2.446
(3.69)***
0.558
(5.79)***
0.024
(0.15)
0.152
(0.38)
0.707
(1.08)
-0.025
(2.91)***
-
2.814
(1.54)
22.225
(1.87)*
1.660
(0.82)
2.440
(3.78)***
0.346
(2.91)***
-0.019
(0.06)
-0.496
(1.60)
0.139
(0.22)
-
4.416
(1.79)*
17.284
(1.53)
2.802
(1.14)
2.835
(3.72)***
0.342
(2.55)**
-0.102
(0.46)
0.356
(0.52)
-0.254
(0.35)
2.027
(1.19)
20.762
(1.91)*
0.979
(0.51)
2.435
(3.69)***
0.325
(2.38)**
-0.090
(0.44)
-0.322
(1.09)
-2.172
(1.32)
2.231
(0.92)
25.910
(1.96)*
0.486
(0.21)
2.481
(3.50)***
0.538
(4.50)***
0.209
(0.68)
0.105
(0.16)
-1.485
(0.75)
-0.027
(2.59)**
-0.001
(0.02)
0.028
(0.52)
0.559
(1.46)
-16.157
(0.56)
-0.037
(0.93)
-24.925
(1.11)
Constant
-30.922
(1.09)
Totalimpactofprojectaid in thetropics
0.532
(5.68)***
-0.055
(0.19)
-
Totalimpactof financial
programaid
in thetropics
Totalimpactof technicalassistancein
thetropics
Totalimpactof foodaid in thetropics
-0.072
(1.44)
-42.885
(1.46)
0.495
(1.47)
-15.790
(0.75)
0.283
(0.44)
-1.677
(1.25)
0.511
(4.47)***
0.208
(0.74)
0.133
(0.22)
-0.925
(0.56)
425
425
425
425
425
71
71
71
71
71
0.000
0.000
0.000
0.000
0.000
0.907
0.427
0.328
0.689
0.758
0.299
0.281
0.286
0.345
0.268
in parentheses;*, **, *** denote significanceat the 10, 5, and 1 perNoe:Robust t-statistics
centlevel,respectively.
Observations
Numberof countries
Arrelano-Bond
testforAR(1) (p-value)
Arrelano-Bond
testforAR(2) (p-value)
Hansentest(p-value)
360
4 ConcludingRemarks
to therecentempiricalliterature
This paperhas attempted
to contribute
aid byinvestigating
on theeffectiveness
ofdevelopment
howdifferent
aid
modalities
affect
Forthispurpose,wetestedthethreemaincompetgrowth.
literature
(i.e.,theBurnsideand Dollar
ingtheoriesin theaid effectiveness
and
Hansen
and
(2000),
Tarp(2001),
Daalgardetal. (2004) specifications),
fora sampleof
usingtheGMM-SYSapproachto dynamicpanelestimator
aid recipient
overtheperiod1974-2001.
countries
exertsa positive
Our resultsappearto suggestthatprojectaid financing
whilst
financial
on
the
of
impact
impact growth,
programaid
significant
is negative.
Theseresultsarerobustacrossall thethreespecifications
used.
As faras thenonfinancial
formof aid is concerned,
we foundno strong
and foodaid contribute
to growth.
evidencethattechnical
assistance
we
find
that
affects
and
positively significantly,
policy
growth
Although
thattheworking
therewas no evidenceto supportthehypothesis
ofaid is
a
We
also
found
evidence
of
nonlinear
on
relationship
contingent policy.
inwhichthepositiveandsignificant
betweenprojectaidandgrowth
impact
returns.
Thishasgenerally
ofprojectaid on growth
issubjecttodiminishing
intheaidliterature
as a problemofabsorptive
beeninterpreted
i.e.,
capacity,
theinability
oftherecipient
economyto absorbverylargeamountofaid.
levelfoundbymoststudies
wearguethat,giventhatthethreshold
However,
theargument
of
is wellabovetheamountaid receivedbymostcountries,
absorptivecapacityis not a plausibleone. A morelikelyexplanationin
thelargerthenumberofprojects
our caseis theproblemofcoordination:
themorecoordination
becomesan issueforbothdonorsandthe
involved,
thata veryhighamountoftechnical
Our evidencealso suggests
recipient.
assistance
can be detrimental
to therecipient
economy.Financialprogram
withgrowth.
aid and foodaid do notexhibitanynonlinearrelationship
As
faras theDaalgardetal. (2004) "story"is concerned,
i.e.,aid worksonlyin
countries
outsidethetropics,our resultsappearto supporttheirfindings.
ofthedifferent
ofaid in
Indeed,we foundthatthetotaleffects
categories
different
fromzero.
thetropicsarenotstatistically
thatprojectaidstimulates
ourresults
appeartosuggest
growth
Although
that
morethantheothertypesofaid oneshouldnotjumptotheconclusion
instrument
adopted
project-based
financing
lendingshouldbe theexclusive
are
based
on
as
these
donors,
only cross-country
by
analysis.To
findings
in
of
new
aid
it
is
avoidrepeating
mistakes
the
policies important
past
design
researchcommunity
to substantiate
the recent
forthe aid effectiveness
Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?
361
in thecontextof country-specific
studies.This taskhas become
findings
criticalgiventheemphasison usingaid to achievetheMDGs bytheyear
2015.
A limitation
of thispaper is thatit relieson veryrestrictive
growth
modelsto capturethe impactof aid flows.The modelsfailto takeinto
accounttheimportant
issueofaidvolatility.
Indeed,studiesbyLensinkand
and
and
Hamann
Bul
(2001,2003,2005) findthataid
(2000)
Morrissey
In relation
country.
volatility
prospectoftherecipient
damagesthegrowth
to theaid disaggregation
issue,Fieldingand Mavrotas(2005) findproject
Anotherimportant
aid and programaid flowsto be subjectto volatility.
models
is
the
issue
of "Dutchdisease"
factoroverlooked
these
by
growth
on
whichhavebeenassociatedwithaid flows.Futureresearch
typeeffects,
theaid-growth
nexusshouldseekto addressthesedeficiencies.
Appendix
Table Al: Data Set Construction
Notes3
Variable
Data source
Per-capitaGDP growth
InitialGDP per capita
WorldBank (2003)
Summersand Heston (1991)
updatedusingGDPG
Naturallogarithmof GDP/capitaforfirstyear
of period;constant1985 dollars
Ethno-linguistic
1960
fractionalization,
Roeder(2001)
Banks (2002)
Assassinations/capita
Assassinations/
capita
M2/GDP,laggedone
period
WorldBank (2003)
Budgetsurplus
WorldBank (2003),
IMF (2003)
Inflation
WorldBank (2003),
IMF (2003)
Sachs-Warner,updated
Net OverseasDevelopmentAssisGDP
tance/nominal
Net projectaid/
nominalGDP
Net financialprogram
aid/nominal
GDP
Ouattara(2005),
WorldBank (2003)
Ouattara(2005),
WorldBank (2003)
362
Data source
Technicalassistance
grants/nominalGDP
Food aid/nominalGDP
DAC (2006),
WorldBank (2003)
Tropicalarea fraction
Notesa
DAC (2006)
a All variables
averages.
aggregatedovertimeusingarithmetic
Source:AdaptedfromRoodman(2004).
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