Selectivity and Foreign Aid Allocation: Is there an Improvement?

Luis Angeles, Celine Azemar and Farhad Noorbakhsh

8-9 April 2008, United Nations Headquarters, New York

Introduction

• Large emphasis in aid selectivity since the late 1990s

• Aid is deemed more selective if it is allocated according to the criteria of need and merit.

• “Aid effectiveness” literature– Aid works in countries with good policies and

institutions: Burnside and Dollar (2000), first published in 1998.

– Lack of robustness in Burnside and Dollar (2000) has been found by Easterly et al. (2004) and others.

– Aid has also been found to work under other conditions.

Recent developments

• Large multilateral and bilateral donors have adhered to the idea of making aid more selective (World Bank 2002, DFID 2003).

• At the same time, there has been an increasing acceptance of the idea that more aid should be given (Millennium Development Goals, G8 Summit at Gleneagles).

Recent developments

Recent developments

Aims

• Analyses of donors’ behavior over the last few years show mixed results (Dollar and Levin 2006, Easterly 2007, Nunnenkamp and Thiele 2007).

• Aims of this paper:

1. Analyze the behavior of aid donors over the period 1984-2003.

2. Test whether there have been changes in this behavior since the late 1990s. Has aid become more selective?

Empirical Methodology

• Baseline econometric specification:

• We consider 3 types of determinants of aid flows

– Recipient countries’ needs: GDP per capita (we also used the Human Development Index)

– Recipient countries’ merits: inflation rate, democracy and institutional quality

– Donor countries’ interests: exports/donor GDP , colonial dummies.

Empirical Methodology

• We use 2 econometric methodologies:– Panel with fixed effects– Tobit

• Data:– Aid data from OECD (gross flows), 104 aid

recipient countries– GDP per capita: Penn World Tables– Inflation: World Bank– Democracy: Freedom House– Institutional quality: ICRG– Exports/GDP: OECD and World Bank

Donors’ behavior 1984-2003

Donors’ behavior 1984-2003

Donors’ behavior 1984-2003

Donors’ behavior 1984-2003

• There is quite some selectivity in aid allocation

• GDP per capita has a negative effect on aid flows

• Inflation and democracy have the expected effect

• For institutional quality the results are mixed

• Donors’ interests also play a role:– More aid flows to trade partners

– More aid to ex-colonies and geopolitically key countries

Changes in donors’ behavior since 1998

Changes in donors’ behavior since 1998

Changes in donors’ behavior since 1998

• Aid becomes more poverty-oriented.– This result differs from Easterly (2007) and Dollar and

Levin (2006)

• For several bilateral donors aid is less linked to trade– Not discussed previously in the literature

• No improvement in the importance given to inflation or democracy, but institutional quality becomes more relevant.– Similar results obtained by Dollar and Levin (2006)