Aid, policies and
Growth
Craig BURNSIDE and David DOLLAR
American economic review
September,2000
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
What we already know : a brief
reminder
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
What we already know
I) Principal topics
• The aim of the paper is to analyze the relationship among
foreign aid, economic policies and growth of GDP per
capita.
• Aid effectiveness, under ‘good policy condition’
• Questions the authors are asking:
1) Is the effect of aid conditional on economic policies?
2) Do donor governments and agencies allocate more aid to
countries with good policies?
3) What other factors affect growth and aid flows?
• Hypothesis of the model : Aid affects growth but its impact
is conditional on the same policies that affect growth
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014
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What we already know
II) 3 sets of equations
• Growth equation
• Aid equation:
• Government consumption equation: function of the
institutional-political variables that affect growth
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014
What we already know
III) Data specifications
• The World Bank Debt Reporting System: official
multilateral and bilateral aid and loans received by the
developing countries, 6 four-year time periods from 1970
until 1993 ;
• 56 countries, 275 observations. low income : 40 countries,
189 observations ;
• Limits :
o panel data estimator should have been used ;
o endogeneity of other regressors than aid/gdp ;
o missing regressors ;
o endogenous sample selection driven by the availibility of
regressors.
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
What we already know
IV) The policy index
• Index constructed with : the budget surplus, the inflation
rate and the openness dummy . This index interacts with
foreign aid :
• Critics:
o there may exist other pertinent policy variables ;
o the weights depend on the other regressors in the
equation: they are not « equal » for each of the three
variables (those variables were not standardized).
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Going further
Litterature review
Regression results : a two stages approach
Determinants of Aid
Impact of Aid on government consumption
Conclusion
Reply and critic
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Litterature review
• BOONE (1995, 1996) : Foreign aid has not raised growth
rates in the typical poor country ;
• SACHS & WARNERS (1995) : Budget surplus, inflation rate
and openness dummy modelisation ;
• GRIFFIN (1970), WEISSKOPF (1972), CHENERY&
SYRQUIN (1975), MOSLEY & AL. (1987), LEVY (1988) :
impact measurement of aid on savings , investment and
growth in developing countries without interaction of aid
and policy ;
• FREY & SCHNEIDER (1986) : the commitment of the
World Bank assistance is associated with good policies such
as low inflation
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Regression results : a two
stages approach
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Regression results : a two stages approach
I) Full data set : Define a policy index excluding terms involving aid
• Formation of the policy index
below using the regression
coefficients :
• The growth regression determine
the relative importance of the
different policies in the index ;
• The constant 1,28 : country’s
predicted growth rate given its
budget surplus, inflation rate and
trade openness.
most significant variables
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Regression results : a two stages approach
II) Full data set : Introduction of Aid/GDP with ind. policy variables
• The partial correlation
between aid and policy
variables is close to 0 ;
•
Variables which
remain significant ;
• Hypothesis : positive
correlation between aid
and the error term ;
• With either OLS and 2SLS
estimator there is no
significant relationship
between aid and growth.
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Regression results : a two stages approach
III) Full data set : Introduction of the policy index
•
The coefficient
on policy is very
close to 1 and the
coefficient on aid
remains small and
insignificant ;
• Others variables
retain their
quantitative
magnitudes and
significance ;
• OLS and 2SLS results
are similar .
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Regression results : a two stages approach
IV) Full data set : Introduction of two interactive terms
•
New interactive
terms ;
• OLS results : aid itself
has a small insignificant
coefficient but aid
interacted with policy
has a significantly
positive coefficient
whereas the quadratic
term has a negative one
;
• The impact of aid on
growth is a positive
function of the level
policy and a negative
function of the level of
aid.
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Regression results : an two stages approach
V) Full data set : Dropping the outliers
• Five big outliers on
a specific range of
years has been
dropped ;
• The quadratic term
becomes
insignificant ;
• The interaction
between aid and
policy is
significant in OLS
and 2SLS.
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Regression results : a two stages approach
VI) Focus on low income countries : regression with no int. terms
• Results quite consistent with
the previous findings ;
• Aid appears to have no
significant impact on growth.
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Kenza BACHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014
Regression results : an eight steps approach
VII) Focus on low income countries : introducing int. of aid & policy
• OLS : the
simple
interaction
term and the
quadratic term
are both
significant.
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Regression results : a two stages approach
VIII) Focus on low income countries : dropping the outliers
• Without
outliers,
the
coefficient
on aid *
policy is
highly
significant
in both OLS
and 2SLS.
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Regression results : a two stage approach
IX) Final results : impact of aid and policy on growth
• If the interaction of aid and policy is omitted, the estimates
are never significantly different from zero ;
• With interaction term added, we consistently find the
impact of aid is greater in a good policy environment
than in a poor policy environment.
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Regression results : a two stages approach
X) Going further : explanation of the interaction of aid and policy
• 13 observations of the largest values of unexplained
Aid/GDP *policy ;
• Quid ?
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Determinants of Aid
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014
Determinants of Aid
• Smaller and poorer countries
get more aids
• Donors strategic interest have
no impact (except for Egypt)
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Determinants of Aid
• Even if it plays a role
more important for
bilateral aid than
multilateral aid ;
• Policy has an impact
only on multilateral
aid whereas it
represents only 1/3
of total aids.
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Impact of Aid on government
consumption
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Impact of Aid on government consumption
• Aid associated with donor interest,
mainly bilateral aid, increases
government consumption ;
• However government
consumption has no impact on
growth ;
• Can provide some insights into
why aid is not effective in the
typical recipient country.
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014
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Conclusion
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Conclusion
• Aid is more efficient on growth in good policy environment ;
• There is no tendency for aid to favor good policy but
multilateral aid is allocated in favor of good policy ;
• Bilateral aid is positively correlated with government
consumption ;
• Can explain why the impact of foreign aid on growth is not
more positive ;
• Recommendations : making aid more systematic conditional
on the quality of politics would increase its impact on growth ;
• Climate for effective aid is increase while the amount of aid
decrease.
Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
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Critic & reply
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Critic & reply
Easterly, Levine and Roodman – Aid, policies and growth,
comment, 2004
• They reexamine whether aid influences growth in the presence
of good policies ;
• They add countries and observations to the original data set ;
• They use exactly the same methodology ;
• They show the robustness of the relationship between aid,
growth and policies.
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Critic & reply
Aid, policies and growth : reply from Burnside and Dollar,
2004
• Data set of Easterly and al is larger than Burnside and
Dollar ones and does not define all variables in the same
way ;
• The additional countries in their data set are responsible
for the different results ;
• They reject the fact that aid has no effect on growth in all
environments.
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Any question?
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Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014
Thank you
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Kenza BACHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014