WHAT IS BEHIND FOREIGN AID INEFFECTIVENESS? Mohamed Mounir Sraieb De Boeck Supé
WHAT IS BEHIND FOREIGN AID INEFFECTIVENESS? Mohamed Mounir Sraieb De Boeck Supérieur | « Reflets et perspectives de la vie économique » 2016/2 Tome LV | pages 61 à 73 ISSN 0034-2971 ISBN 9782807390720 DOI 10.3917/rpve.552.0061 Article disponible en ligne à l'adresse : -------------------------------------------------------------------------------------------------------------------- https://www.cairn.info/revue-reflets-et-perspectives-de-la-vie- economique-2016-2-page-61.htm -------------------------------------------------------------------------------------------------------------------- Distribution électronique Cairn.info pour De Boeck Supérieur. © De Boeck Supérieur. Tous droits réservés pour tous pays. La reproduction ou représentation de cet article, notamment par photocopie, n'est autorisée que dans les limites des conditions générales d'utilisation du site ou, le cas échéant, des conditions générales de la licence souscrite par votre établissement. Toute autre reproduction ou représentation, en tout ou partie, sous quelque forme et de quelque manière que ce soit, est interdite sauf accord préalable et écrit de l'éditeur, en dehors des cas prévus par la législation en vigueur en France. Il est précisé que son stockage dans une base de données est également interdit. Powered by TCPDF (www.tcpdf.org) © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) Reflets et Perspectives, LV, 2016/2 — 61 DOI: 10.3917/rpve.552.0061 What is Behind Foreign Aid Ineffectiveness? Mohamed Mounir Sraieb1 Abstract – Despite the highly significant flows involved, development aid has turned out to be ineffective in a large number of recipient countries. This paper2 explores the reasons behind aid failure. It starts from an investigation of donors’ motivations for aid allocation and examines their potential implications on aid policies. The main findings are that aid seems to be heavily impacted by inertia. Along with self-interest, this may explain the time-inconsistency problem facing aid donors. Next, the paper examines strategies toward mitigating such a time-inconsistency, including reputation signaling and changing aid modalities. This provides guidance on how aid should be optimally allocated among recipient countries. Keywords: development aid, effectiveness, aid modalities, inertia, dynamic panel, targeted infrastructure JEL classification: C3, D86, F35, O1, O12, O19 1 WHAT IS BEHIND THE INEFFECTIVENESS OF AID? Widespread conceptual and empirical literature suggests that foreign aid is inef- fective (Alesina and Dollar, 2000; Bourguignon and Sundberg, 2007; Faye and Niehaus, 2012; Qian and Nunn, 2014). The efforts of the international community translated in the Monterrey consensus (2002) and the Paris Declaration on Aid Effectiveness (2005), further supported by the Accra Agenda for Action (2008) and the series of U.N. Summits for Financing Development (the latest took place 1. Contact: msraieb@ulb.ac.be or https://sites.google.com/site/sraiebmohamedmounir/home Ecares, Université libre de Bruxelles 2. This paper is a brief summary of my doctoral dissertation. My research therein contributes to the theoretical and empirical literature on aid effectiveness and explores the ability of aid to achieve its goals in the presence of both incentives and informational asymmetries. © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) 62 Mohamed Mounir Sraieb on October 2015 in Addis-Ababa)3 should be seen through the lenses of improv ing the dull development results. What explains the failure of development aid4 in alleviating poverty and promoting growth? and what should be done about it? These are the central questions investigated in this paper. To put things into perspective, it is useful to examine data. In 2012, roughly, USD 491 billion5 were channeled to developing countries. This represents almost the aggregate GDP of all the 34 low-income countries (USD 527 billion) for 2012, and more than 545 times the GDP of say, Gambia (USD 914 million) or Guinea- Bissau (USD 822 million) for the same year. However, despite these significant flows, the empirical literature suggests that aid failed short from fulfilling its role. Some conclusions were drawn in this respect. First, such a failure is largely due to bad governance in recipient countries. Second, conditionality may not help to address such a failure. Third, the most efficient way to give aid is either under the form of project assistance or exclusively through budget support. In a recent re search (Sraieb, 2015c), I investigate each of these findings and I show that once accounted for, agents’ incentives and information structure may invalidate such conclusions. 1.1 Donors’ Motivation: what drives generosity? A natural starting point for the analysis is to explore the reasons behind aid fail ure, especially in least developed countries. A large part of the empirical literature that investigated the question focused on characteristics of recipient countries. In particular, corruption, limited absorption capacity and lack of good governance in recipient countries, are identified as the culprits for the ineffectiveness of aid. This paper suggest that these may not be he only sources for aid failure and I show that donors’ behaviour may have contributed to it. Basically, the reason is that donors may have not always taken their responsibilities in disciplining recipients through provision of the right incentives and signaling. Strikingly, this put emphasis on the rational of the donors for giving aid. Therefore, a straightforward step ahead in the analysis is to investigate donors’ motivations behind aid provision. 3. Monterrey Consensus (2002) has become the major reference point for development co-opera tion. It was the outcome the United Nations International Conference on Financing for Develop ment at Monterrey 2002. The Paris Declaration (2005) is an action-oriented road-map to improve the quality of aid and its impact on development. The Accra Agenda for action (2008) is designed to strengthen and deepen implementation of the Paris Declaration. It monitors progress and sets the agenda for a sustained implementation of the Paris targets. 4. In this paper, I use interchangeably the terminology of development aid, foreign assistant or for eign aid to refer to official development assistance (ODA). OECD defines ODA as those flows of official financing administered by official agencies with the promotion of the economic develop ment and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25 percent. 5. Data on aid are collected from the OECD aid statistics portal. Those on GDP are collected from the World Bank database. © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) What is Behind Foreign Aid Ineffectiveness? What is Behind Foreign Aid Ineffectiveness? 63 In Sraieb (2015a), three categories of variables are used as proxies for the donor motivations: (i) variables representing the need of recipient countries. these translate the altruistic motivations of the donor, (ii) variables representing the do nor’s self-interest/strategic concerns, and (iii) variables proxying the merit-based motivation of the donor. Each of the motivation categories makes use of a num ber of proxies as summarized in Table 1: Table 1. Motivation categories and explanatory variables Aid M otivation V ariable Inertia P ast Aid Need GDP per capita of the recipient country Good governance Dem ocracy score, Score on PTS, M ilitary expenditure, F reedom from corruption Merit-based Market liberalization T rade freedom , Financial freedom Commercial concerns U .S exports Self-interest Geo-political concerns Military assistance, V otes in the U .N. Interestingly, the merit-based variables are broken down into proxies for the quality of governance in the recipient country (democracy, human rights, reduced military expenditure, absence of corruption, etc.), and proxies for market liber alization policies in terms of the “Washington Consensus” requirements6 (mar ket liberalization and economic freedom in general). These variables translate the propensity of the recipient country to engage in effective market liberalization policies. Furthermore, a variable representing the amount of past aid received is introduced to account for the inertia effect. All of the variables7 presented in Table 1 are meant to explain whether a par ticular recipient receives aid; and if yes, then how much? In this paper, all of the covariates are lagged one year. The econometric justification of this procedure is to avoid the risk of reverse causality between the aid variable and each of the explanatory variables. On an economic ground, lagging the variables allows to account for the delay necessary to the donor country to acquire the information specific to each potential aid recipient. In addition, when feasible, I take the natural log for all variables. Likewise, I take the natural log for the dependent variable in order to have a less skewed distribution. The resulting log-log model would help to reduce the outliers’ effect and allows for interpreting the coefficients as elasticities. 6. Recall that the “Washington Consensus” refers to a set of broadly free market economic prescrip tions supposed to be in line with policy advices by Washington, D.C.-based international organi zations. 7. A description of the content of each variable is provided in the appendix. © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) © De Boeck Supérieur | Téléchargé le 08/07/2022 sur www.cairn.info (IP: 212.147.59.126) 64 Mohamed Mounir Sraieb 1.2 What is New?: Introducing Dynamics and Economic Freedom Concerns Accounting for inertia in the model and adding market liberalization concerns in the merit-based motivations of the uploads/Management/ rpve-552-0061.pdf
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