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 –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

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 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

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

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)