Foreign Aid Allocation, Governance, and Economic Growth

Foreign Aid Allocation, Governance, and Economic Growth

Copyright Date: 2012
Pages: 184
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  • Book Info
    Foreign Aid Allocation, Governance, and Economic Growth
    Book Description:

    How important is foreign aid in fostering economic growth in developing countries? Does it help recipient countries, hurt them, or have little effect either way?Foreign Aid Allocation, Governance, and Economic Growthinvestigates this issue by looking at foreign aid by sector rather than treating it as an aggregate amount. Aid can be allocated to a recipient's production sectors (such as agriculture, manufacturing, or mining), economic infrastructure (such as transport, storage, or communications networks or power generation facilities), or social sectors (such as education or healthcare). This book differentiates among various channels through which each of these three categories of foreign aid affects economic growth.

    The findings suggest that economic aid, including aid to production sectors and economic infrastructure, contributes to economic growth by increasing domestic investment. Aid to social sectors, however, does not appear to have a significant impact on human capital (measured by school enrollment) and economic growth. This study also assesses the degree to which the quality of democratic governance in a recipient country influences foreign aid's effectiveness and finds that democracy is no guarantee of aid effectiveness. In fact, economic aid to less democratic countries can lead to better economic growth, at least initially, provided the aid recipients secure property rights and allow capital accumulation. Although further research into the question is necessary,Foreign Aid Allocation, Governance, and Economic Growthsuggests that aid targeted to increasing domestic investment might be an effective means of fostering economic growth in less developed countries.

    eISBN: 978-0-8122-0773-6
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. List of Figures
    (pp. vii-viii)
  4. List of Tables
    (pp. ix-x)
  5. Foreword
    (pp. xi-xii)
    Shenggen Fan

    Both bilateral and multilateral donors have increased their official development assistance (ODA) from its levels at the start of the twenty-first century. The combined effect of these aid increases has been to raise ODA by nearly 80 percent in real terms since 2000, and total net ODA flows reached about US$130 billion in 2010—the highest real ODA level in history. Although development outcomes are largely determined by the less developed countries themselves, foreign development assistance can provide such countries with additional resources to enhance their development prospects and promote economic growth and poverty reduction. The existing empirical literature is...

  6. Acknowledgments
    (pp. xiii-xiv)
  7. Acronyms and Abbreviations
    (pp. xv-xviii)
  8. 1 Introduction
    (pp. 1-4)

    In 2010, the total net official development assistance flows from members of the Development Assistance Committee of the Organisation for Economic Cooperation and Development (OECD) rose to US$128.7 billion, the highest real dollar figure ever recorded, reflecting a general scaling up of foreign aid (OECD 2011).¹ Although the scaling up of foreign aid seems to bring hope and the prospect of a better future for the poor in developing countries, it will also raise many challenges. Can foreign development assistance help promote pro-poor growth and poverty reduction in developing countries? Is there any evidence that foreign aid causes greater economic...

  9. 2 Overview of Previous Studies
    (pp. 5-25)

    The community of donors has now accumulated more than five decades of experience in providing aid to developing countries. The objectives, strategies and policies, amount, and composition of foreign aid to developing countries have changed substantially over time. Although in the early years it was expected that the need for foreign assistance would decline as private capital became available to developing countries, official foreign assistance has remained the most important source of external financing for most developing countries. Although international flows of private capital to developing countries have increased significantly in recent years, the bulk of these flows are concentrated...

  10. 3 Data and Descriptive Analysis
    (pp. 26-41)

    This chapter describes data sources, measurement issues, and descriptive analysis of data. A panel dataset covering aid from both bilateral and multilateral donors over the past five decades was compiled for the purposes of empirical analysis (see Appendix B for a list of donors and recipient countries). I use data from various sources. First, the study relies heavily on data from OECD’s Development Assistance Committee (DAC) database (OECD, Development Database on Aid from DAC Members: DAC Online, various years), as well as from its Credit Reporting System (CRS) (OECD, Development Database on Aid Activities: CRS Online, various years). The OECD...

  11. 4 Aid Allocation
    (pp. 42-56)

    Aggregate patterns, such as those shown in Przeworski et al. (2000), suggest that the relationship between the level of economic development and the democratic quality of governance is strong and robust. Therefore, with few exceptions, one can plausibly predict the quality of governance in a given country just by looking at the level of its per capita income or vice versa. In this context, the typology of countries based on the quality of governance developed in the previous chapter can be considered as a proxy for the level of economic development. The important question, however, has to do with the...

  12. 5 Aid and Economic Growth
    (pp. 57-118)

    One of the most enduring policy debates in development economics has to do with whether foreign aid helps recipient countries grow. This chapter contributes to this debate in three ways. First, most studies examine whether there is a causal link between aggregate aid flows and growth rates in aid recipient countries. However, as mentioned elsewhere, this approach might be flawed by the notion that aid flows are allocated to different sectors of the economy and for different purposes, and therefore they are less likely to affect growth in the same way and uniformly. This study disaggregates aggregate aid into sectoral...

  13. 6 Conclusion
    (pp. 119-124)

    This study has examined the aid–growth relationship by disaggregating total aid into economic, social, and other aid components. The main assumption in this study is that only the economic and social aid components are likely to affect economic growth in recipient countries. These two aid components account for roughly two-thirds of total aid and are intended by donors to build additional physical and human capital in recipient countries. Other aid components (for example, food and emergency aid) account for one-third of total aid and are primarily intended for consumption purposes. The analytical framework of the study differentiates three possible...

  14. Appendix A Development Thinking and Foreign Aid
    (pp. 127-130)
  15. Appendix B Lists of Donors and Aid Recipients
    (pp. 131-131)
  16. Appendix C Definitions and Sources of Regression Variables
    (pp. 132-135)
  17. Appendix D Descriptive Summary Statistics
    (pp. 136-136)
  18. Appendix E General Characteristics of Political Rights Scores and Civil Liberties Scores
    (pp. 137-138)
  19. Appendix F Governance and Rent Extraction–Efficiency Trade-off in Aid Allocation
    (pp. 139-143)
  20. Appendix G Derivation of the Growth Equation Augmented with Human Capital
    (pp. 144-148)
  21. References
    (pp. 149-158)
  22. Index
    (pp. 159-163)
  23. About the Author
    (pp. 164-164)