Abstract
This paper investigates the importance of bureaucratic inertia in foreign aid allocation. Inertia puts a limit on the ability of foreign aid to alleviate poverty and promote growth. We exploit the 9/11 attacks as a natural experiment that provides a lower bound on the effects of inertia. We make use of a dynamic panel data model combined to a proper treatment of the sample selection problem inherent to virtually all models on aid decisions. The paper moves beyond existing studies and provides an ordering of the donor’s motivations. Interestingly, merit-based motivations have sizable effects on aid decisions. However, inertia is found to drive most of the aid distribution. This may provide a rationale for the weak enforcement of aid contracts. Inertia introduces a time inconsistency problem on the side of the donor. Ex-post, the donor of conditional aid has incentives to deliver it regardless of reforms’ implementation or recipient’s discipline. Anticipation that this will happen destroys the recipient’s incentive to carry out costly policy reforms. This puts the whole aid architecture under strain. Coordination among donor agencies, donors’ investment in reputation and institution building as well as changing aid modalities rather than volumes seems to be promising routes toward re-establishing efficiency.
Similar content being viewed by others
Notes
McGillivray and White (1993), state that “a commonly identified influence is the tendency for aid bureaucracies, like other spending agencies, to use the preceding year’s allocation as a benchmark for the current year’s aid allocation in a process of marginal incrementalism or bureaucratic inertia. In a more general context, Wildavsky (1964) states that the principal influence on the budget for any spending agency in the current year is last year’s budget. Mosley (1985) states that this is, even stronger in the case of aid than of other categories of public expenditure, since most of the aid announced consists of money committed several years in advance to the support of particular projects.
We restrict attention to official development assistance (ODA) defined by the OECD as those flows of official financing administered with the promotion of the economic development and welfare of developing countries as the main objective, and which are concessional in character with a grant element of at least 25%.
In addition, Furuoka (2008) does not report on the number of instruments used which casts doubt on the quality of the results as instruments proliferation is another limitation of differenced-GMM (Roodman 2009b). The lack of information relates also to whether a one-step or a two-step GMM estimator was used. Likewise, it is not reported whether tests use the Windmeijer (2005) finite-sample correction to the reported standard errors. Without this correction, the standard errors tend to be highly downward biased.
Recall that the Washington Consensus refers to a set of broadly free market economic prescriptions developed in 1989 by economist John Williamson and supposed to be in line with policy advises by Washington, D.C.-based international organizations.
Although many alternative explanatory variables could be considered to capture recipient’s need, GDP per capita is the most commonly used due to its availability and its strong correlation with other need variables such as life expectancy, infant mortality, or literacy. Neumayer (2003) shows that these other need variables are statistically non-significant once income is controlled for.
The list of countries eligible for ODA is established by the Development Assistance Committee (DAC) of the OECD.
Alesina and Dollar (2000) made a comment in the same vein, while discussing the appropriateness of applying OLS versus the usage of a Tobit procedure that accounts for the truncated nature of the aid data.
As discussed in Sect. 2, we follow Alesina and Dollar (2000), Berthélemy (2006), Neumayer (2003) among others in classifying donor’s motivations as altruistic when they are driven by recipients economic needs. Likewise, when aid is used as a tool to protect and promote donor’s political, geo-strategic or economic and commercial interests, it is guided by self-interest. Therefore, we classify donor’s motivations as opportunistic. However when aid is allocated among recipient countries based on their respective records in terms of good governance and implementation of market liberalization policies, it is said to be driven by merit-based motivations.
For obvious reasons, we do not carry the log transformation for qualitative ordinal scores (Democracy, PTS, etc.). Taking the log would not have much sense.
In our model, using all available lags results in a number of instruments that is still lower than the country count. This is a first indication that instruments proliferation would not be an issue here
Kanbur (2006) gives striking examples of real experiences showing how difficult it is for the donors to suspend the release of aid, even if the recipient fails in meeting the conditions for giving funds
Aid conditionality means that donors attach conditions for entering into an aid agreement with the recipient or for keeping up aid.
In the literature, the relationship between ODA and the level of GDP per capita is controversial both in terms of its sign and its significance. Fielding (2014) studying humanitarian aid provided by the USA as well as Apodaca and Stohl (1999) studying US bilateral economic and military aid found a (negative but) non-significant relationship. Furuoka (2008) in a study on ODA from all sources, whether bilateral or multilateral found that relatively wealthy developing countries have received larger amounts of aid.
Neumayer (2003), finds that personal integrity rights are statistically non-significant at best, and exert a negative influence on aid allocation, at worst.
The PITF is funded by the Central Intelligence Agency, meaning that if the US administration bases its ODA allocations on a political instability score, the PITF would be the most likely candidate.
The classification of countries as low-income or middle-income countries is defined by the World Bank, based on gross national income GNI per capita
The authors apply the MMSC and downward testing procedures to dynamic panel data models. The criteria select the correct model specification and moment conditions for GMM estimations. The method is based on the J statistic for testing over-identifying restrictions and has parallel with the likelihood-based selection criteria Akaike information criteria (AIC), Bayesian information criteria (BIC) or Hannan-Quinn information criteria (HQIC).
Alesina and Dollar (2000) use a similar logic by introducing different variables into the regression sequentially, as a way to look at their relative importance. The difference here is that Alesina and Dollar (2000) compare the coefficients of determination (they are using the OLS technique) and they are interested in the contribution of individual variables to the explanatory power of the model. Our focus is rather the vectors of motivations (need, merit, self-interest)
A detailed explanation of the dimension along which each of these three pillars is measured are available on MCC’s website. For instance, “investing in people” is measured by scores on (i) immunization rate, (ii) public expenditure on health, girls’ primary education, child health, natural resource protection, etc. Moreover, MCC publishes the list of data sources for each criterion. These include the World Bank, UNICEF, UNESCO, WHO, etc.
References
Aldasoro I, Nunnenkamp P, Thiele R (2010) Less aid proliferation and more donor coordination? The wide gap between words and deeds. J Int Dev 22(7):920–940
Alesina A, Dollar D (2000) Who gives foreign aid to whom and why? J Econ Growth 5(1):33–63
Alesina A, Weder B (2002) Do corrupt governments receive less foreign aid? Am Econ Rev 92(4):1126–1137
Andrews DW, Lu B (2001) Consistent model and moment selection procedures for GMM estimation with application to dynamic panel data models. J Econom 101(1):123–164
Antoniou A, Guney Y, Paudyal K (2008) The determinants of capital structure: capital market-oriented versus bank-oriented institutions. J Financ Quant Anal, pp 59–92
Apodaca C, Stohl M (1999) United states human rights policy and foreign assistance. Int Stud Q 43(1):185–198
Arellano M (2003) Panel data econometrics. Oxford University Press, Oxford
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297
Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econom 68(1):29–51
Bates RH, Epstein DL, Goldstone JA, Gurr TR, Harff B, Kahl CH, Knight K, Levy MA, Lustik M, Marshall MG (2003) Political instability task force report: phase iv findings. Science Applications International Corporation, McLean
Berthélemy J (2006) Bilateral donors’ interest vs. recipients’ development motives in aid allocation: do all donors behave the same? Rev Dev Econ 10(2):179–194
Berthélemy JC, Tichit A (2004) Bilateral donors’ aid allocation decisions—a three-dimensional panel analysis. Int Rev Econ Finance 13(3):253–274
Blundell R, Bond S (1998) Initial conditions and moment restrictions in dynamic panel data models. J Econom 87(1):115–143
Blundell R, Bond S, Windmeijer F (2001) Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator. Emerald Group Publishing Limited
Boschini A, Olofsgård A (2007) Foreign aid: an instrument for fighting communism? J Dev Stud 43(4):622–648
Bourguignon F, Platteau JP (2015) The hard challenge of aid coordination. World Dev 69:86–97
Burnside C, Dollar D (2000) Aid, policies, and growth. Am Econ Rev 90(4):847–868
Bush GW (2002) The national security strategy of the United States of America. Tech. rep., Executive Office of the President of the U.S
Carey SC (2007) European aid: human rights versus bureaucratic inertia? J Peace Res 44(4):447–464
Dudley L, Montmarquette C (1976) A model of the supply of bilateral foreign aid. Am Econ Rev 66(1):132–142
Fielding D (2014) The dynamics of humanitarian aid decisions. Oxf Bull Econ Stat 76(4):536–564
Frot E, Santiso J (2011) Herding in aid allocation. Kyklos 64(1):54–74
Fuchs A, Nunnenkamp P, Öhler H (2015) Why donors of foreign aid do not coordinate: the role of competition for export markets and political support. World Econ 38(2):255–285
Furuoka F (2008) A dynamic model of foreign aid allocation. Econ Bull 15(8):1–13
Gartzke E, Jo DJ (2006) The affinity of nations index, 1946–2002. Columbia University, New York
Holtz-Eakin D, Newey W, Rosen HS (1988) Estimating vector autoregressions with panel data. Econometrica 56(6):1371–1395
Kanbur R (2006) The economics of international aid. Handbook of the economics of giving, altruism and reciprocity, vol 2, pp 1559–1588
Kilby C, Dreher A (2010) The impact of aid on growth revisited: Do donor motives matter? Econ Lett 107(3):338–340
Lai B (2003) Examining the goals of us foreign assistance in the post-cold war period, 1991–96. J Peace Res 40(1):103–128
Marshall MG, Jaggers K, Gurr TR (2010) Polity IV project: political regime characteristics and transitions. Center Syst Peace 10:24–37
McGillivray M, White H (1993) Explanatory studies of aid allocation among developing countries: a critical survey. ISS Working Paper Series/General Series, vol 148, pp 1–86
Mosley P (1985) The political economy of foreign aid: a model of the market for a public good. Econ Dev Cult Change 33(2):373–393
Neumayer E (2003) Do human rights matter in bilateral aid allocation? A quantitative analysis of 21 donor countries. Soc Sci Q 84(3):650–666
OECD (2020) International development statistics online database
Roodman D (2009a) How to do xtabond2: an introduction to difference and system GMM in stata. Stata J 9(1):86–136
Roodman D (2009b) A note on the theme of too many instruments. Oxf Bull Econ Stat 71(1):135–158
SIPRI (2016) Military expenditure database. Stockholm International Peace Research Institute
Wildavsky AB (1964) Politics of the budgetary process
Windmeijer F (2005) A finite sample correction for the variance of linear efficient two-step gmm estimators. J Econom 126(1):25–51
Wintoki MB, Linck JS, Netter JM (2012) Endogeneity and the dynamics of internal corporate governance. J Financ Econ 105(3):581–606
Author information
Authors and Affiliations
Corresponding author
Ethics declarations
Conflict of interest
The authors declare that they have no conflict of interest.
Additional information
Publisher's Note
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Supplementary Information
Below is the link to the electronic supplementary material.
Rights and permissions
About this article
Cite this article
Sraieb, M.M. The dynamics of US foreign aid decisions. Empir Econ 63, 1859–1886 (2022). https://doi.org/10.1007/s00181-022-02200-0
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-022-02200-0