Aid, policies and Growth Craig BURNSIDE and David DOLLAR American economic review September,2000 Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

What we already know : a brief reminder Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

What we already know I) Principal topics The aim of the paper is to analyze the relationship among foreign aid, economic policies and growth of GDP per capita. Aid effectiveness, under ‘good policy condition’ Questions the authors are asking: 1) Is the effect of aid conditional on economic policies? 2) Do donor governments and agencies allocate more aid to countries with good policies? 3) What other factors affect growth and aid flows? Hypothesis of the model : Aid affects growth but its impact is conditional on the same policies that affect growth Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

What we already know II) 3 sets of equations Growth equation Aid equation: Government consumption equation: function of the institutional-political variables that affect growth Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

III) Data specifications What we already know III) Data specifications The World Bank Debt Reporting System: official multilateral and bilateral aid and loans received by the developing countries, 6 four-year time periods from 1970 until 1993 ; 56 countries, 275 observations. low income : 40 countries, 189 observations ; Limits : panel data estimator should have been used ; endogeneity of other regressors than aid/gdp ; missing regressors ; endogenous sample selection driven by the availibility of regressors. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

What we already know IV) The policy index Index constructed with : the budget surplus, the inflation rate and the openness dummy . This index interacts with foreign aid : Critics: there may exist other pertinent policy variables ; the weights depend on the other regressors in the equation: they are not « equal » for each of the three variables (those variables were not standardized). Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Going further Litterature review Regression results : a two stages approach Determinants of Aid Impact of Aid on government consumption Conclusion Reply and critic Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Litterature review BOONE (1995, 1996) : Foreign aid has not raised growth rates in the typical poor country ; SACHS & WARNERS (1995) : Budget surplus, inflation rate and openness dummy modelisation ; GRIFFIN (1970), WEISSKOPF (1972), CHENERY& SYRQUIN (1975), MOSLEY & AL. (1987), LEVY (1988) : impact measurement of aid on savings , investment and growth in developing countries without interaction of aid and policy ; FREY & SCHNEIDER (1986) : the commitment of the World Bank assistance is associated with good policies such as low inflation Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014 Kenza BACHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation

Regression results : a two stages approach Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

I) Full data set : Define a policy index excluding terms involving aid Regression results : a two stages approach I) Full data set : Define a policy index excluding terms involving aid Formation of the policy index below using the regression coefficients : The growth regression determine the relative importance of the different policies in the index ; The constant 1,28 : country’s predicted growth rate given its budget surplus, inflation rate and trade openness. most significant variables Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

II) Full data set : Introduction of Aid/GDP with ind. policy variables Regression results : a two stages approach II) Full data set : Introduction of Aid/GDP with ind. policy variables The partial correlation between aid and policy variables is close to 0 ; Variables which remain significant ; Hypothesis : positive correlation between aid and the error term ; With either OLS and 2SLS estimator there is no significant relationship between aid and growth. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

III) Full data set : Introduction of the policy index Regression results : a two stages approach III) Full data set : Introduction of the policy index The coefficient on policy is very close to 1 and the coefficient on aid remains small and insignificant ; Others variables retain their quantitative magnitudes and significance ; OLS and 2SLS results are similar . Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

IV) Full data set : Introduction of two interactive terms Regression results : a two stages approach IV) Full data set : Introduction of two interactive terms New interactive terms ; OLS results : aid itself has a small insignificant coefficient but aid interacted with policy has a significantly positive coefficient whereas the quadratic term has a negative one ; The impact of aid on growth is a positive function of the level policy and a negative function of the level of aid. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

V) Full data set : Dropping the outliers Regression results : an two stages approach V) Full data set : Dropping the outliers Five big outliers on a specific range of years has been dropped ; The quadratic term becomes insignificant ; The interaction between aid and policy is significant in OLS and 2SLS. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

VI) Focus on low income countries : regression with no int. terms Regression results : a two stages approach VI) Focus on low income countries : regression with no int. terms Results quite consistent with the previous findings ; Aid appears to have no significant impact on growth. Kenza BACHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

VII) Focus on low income countries : introducing int. of aid & policy Regression results : an eight steps approach VII) Focus on low income countries : introducing int. of aid & policy OLS : the simple interaction term and the quadratic term are both significant. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

VIII) Focus on low income countries : dropping the outliers Regression results : a two stages approach VIII) Focus on low income countries : dropping the outliers Without outliers, the coefficient on aid * policy is highly significant in both OLS and 2SLS. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

IX) Final results : impact of aid and policy on growth Regression results : a two stage approach IX) Final results : impact of aid and policy on growth If the interaction of aid and policy is omitted, the estimates are never significantly different from zero ; With interaction term added, we consistently find the impact of aid is greater in a good policy environment than in a poor policy environment. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

X) Going further : explanation of the interaction of aid and policy Regression results : a two stages approach X) Going further : explanation of the interaction of aid and policy 13 observations of the largest values of unexplained Aid/GDP *policy ; Quid ? Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Determinants of Aid Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

Determinants of Aid Smaller and poorer countries get more aids Donors strategic interest have no impact (except for Egypt) Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Determinants of Aid Even if it plays a role more important for bilateral aid than multilateral aid ; Policy has an impact only on multilateral aid whereas it represents only 1/3 of total aids. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Impact of Aid on government consumption Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Impact of Aid on government consumption Aid associated with donor interest, mainly bilateral aid, increases government consumption ; However government consumption has no impact on growth ; Can provide some insights into why aid is not effective in the typical recipient country. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014

Conclusion Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Conclusion Aid is more efficient on growth in good policy environment ; There is no tendency for aid to favor good policy but multilateral aid is allocated in favor of good policy ; Bilateral aid is positively correlated with government consumption ; Can explain why the impact of foreign aid on growth is not more positive ; Recommendations : making aid more systematic conditional on the quality of politics would increase its impact on growth ; Climate for effective aid is increase while the amount of aid decrease. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Critic & reply Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Critic & reply Easterly, Levine and Roodman – Aid, policies and growth, comment, 2004 They reexamine whether aid influences growth in the presence of good policies ; They add countries and observations to the original data set ; They use exactly the same methodology ; They show the robustness of the relationship between aid, growth and policies. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Critic & reply Aid, policies and growth : reply from Burnside and Dollar, 2004 Data set of Easterly and al is larger than Burnside and Dollar ones and does not define all variables in the same way ; The additional countries in their data set are responsible for the different results ; They reject the fact that aid has no effect on growth in all environments. Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Any question? Kenza BECHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Presentation 10/10/2014

Thank you Kenza BACHIRI, Zeinab BOUAROUK, Keïssa HOCINE Development economics Présentation 10/10/2014