1. Determinants of Aid Flows: Comparative Approach
International Development Cooperation:
Theory & Practice
SNU GSIS
Determinants of Aid Flows: Comparative Approach

2. Determinants of aid allocation
From last week… variables that affect bilateral aid allocation
Recipient’s condition
: poverty (income level), population, policy (institution)…
Bilateral characteristics
: colonial history, political alliance (UN friend), commercial interest (trade/investment relationship)…
Donor’s condition
: domestic politics, policy-making process, public support, peer pressure
Comparative approach
Between donors
US, Japan, Germany, France, Nordic Donors, EU
Between time periods
Cold-War era, after end of Cold War, after 9/11

3. Aid Allocation Studies: Approaches
RN/DI model
recipient need / donor interest
‘hybrid’ model
both RN & DI and other variables
‘biases’ approach
population bias, middle-income bias
Limited dependent variable model
Two stage process: eligibility & amount allocated
Difficulties in empirical studies
Specification of model
Different estimation techniques
Choice of variables & proxies
DV: Nominal aid, aid/c, % of D’s budget or R’s GDP…
R’s policy condition: indicators, growth rate…
Data availability
Population bias exists when… e.g., small countries have relatively big (voting) power
Middle-income bias exists mainly due to the economic and political importance of middle-income countries or their relatively well-developed bureaucracies and institutions.
Two-stage model can help explaining why some countries receive no aid at all and the amounts allocated to those deemed eligible.

4. Comparison of US, Japan, France & Sweden (Schraeder, Hook & Taylor 1998)
(in 1980s)
HN variables & GNPpc
GNPpc as a economic potential variable
Africa as a subset of recipients
Dependent variable: aid/R’s GNP

5. Comparison of 4 + Germany, Netherlands, UK (Clist 2009)
Large differences between donors
Dependent variable: % of total donor ODA commitment, 5 year average from
Eligibility Stage using a probit model. Level Stage using OLS.
Eligibility Stage ( )
Level Stage ( )
Poverty, Population, Policy, Proximity (language, religion, colony, export, arms export
Poverty sensitivity – high: Netherlands, Sweden, UK; medium: Germany, Japan; low: USA, France
Little effects of policy in recipients
- Freedom Index: a scale from 2 (worst) to 14 (best) from Freedom House
- PTS: from 1 (worst) to 5 (best) Amnesty International and US State Dept.
Colony – France, UK
US military grants

6. Comparison of time periods (Clist 2009)
Little changes over time in importance of poverty and policy in donors’ aid allocation practices
Little evidence of the end of cold war increasing importance of poverty
Poverty sensitivity are between donors not time periods.
Policy sensitivity is low and fairly static, too.

7. Changes over time (Harrigan & Wang 2011)
Before and after the Cold War
Dependent variable: aid(c) per capita
AVEGDPG: average growth rate of t-2 to t as a measurement of policy environment
DUM90: dummy for year from 1990 onwards
Dataset: 153 countries,
Good policy environment: no change for MultiO, US, Canada, Japan; for Italy and UK, less importance
Other than Japan and France, GDPpc has consistent importance

8. Why donors give aid? Various motives of Foreign Aid
Moral obligation/Humanitarianism
To assist recipients achieve their development goals (economic growth, poverty reduction)
Strategic alliances
To strengthen donor’s own political and strategic influence
Commercial interests
To expand markets and promote commercial interest
Historical/colonial ties
Global interdependency
To provide/protect global public goods and reduce ill effects of global evils
Most donors have allocated aid on the basis of a mix of these different factors…

9. To whom donors give aid? Two stages process of aid allocation?
Whether to give aid or not
Whether a country receives aid (eligibility)
How much to each eligible county
How much aid it receives
What criteria to consider in deciding how much aid to whom?
recipient need (RN)
recipient economic/political situation?
donor interest (DI)
economic, strategic,
aid effectiveness/efficiency?
economies of scale (more focused on less countries)
better institution?
universal values?
promotion of Democracy, human rights…

10. Case of Korea Establishment of Aid agencies and legal basis
EDCF in 1987
KOICA in 1991
2010 Framework Act on International Development Cooperation
5 basic principles
(i) reduce poverty in developing countries;
(ii) improve the human rights of women and children, and achieve gender equality;
(iii) realize sustainable development and humanitarianism;
(iv) promote cooperative economic relations with developing partners; and
(v) pursue peace and prosperity in the international community
Basic guidelines of aid distribution in Strategic Plan
minimum 70% of bilateral ODA to 26 Priority partner countries
55% of bilateral ODA to Asia, 20% to Africa

11. Case of Korea: empirical studies
구정우 and 김대욱 (2011). 「세계사회와 공적개발원조: 한국 ODA 결정요인 분석, 」. 『한국사회학』 45(1):
[Koo, J.-W. and D.-W. Kim (2011). "World Society and Official Development Assistance: Explaining Determinants of Korean ODA, " Korean Journal of Sociology 45(1): ]
Kim, E. M. and J. Oh (2012). "Determinants of foreign aid: the case of South Korea." Journal of East Asian Studies 12(2):

12. Koo & Kim (2011)
DV: total bilateral ODA (net disbursement, current price)
data: 142 countries,
regressors
bilateral trade
Korea’s FDI
GDPpc
total global ODA
total ODA in recipient
population
Asia dummy 1. 2. 3. 4. 5. 6. 7.

13. Kim and Oh (2012) DV: ODA per capita (commitment, constant price)
data: 154 countries, , separate estimation by period and political regime

14. Is China’s Aid Allocation Different?
Perception on China’s aid: ‘rogue’ aid?
Put less importance to recipient need
Predominantly affected by commercial reasons
To secure its resource needs
To bribe countries to get support in international politics
Neglects the recipient countries’ institutional quality
Chinese aid undermines the efforts of other donors to enhance aid effectiveness and to promote democracy and good governance.
Whether and to what extent Chinese aid was affected by developmental, governance-related, political or commercial motives? What is the difference from those of traditional donors?
Dreher & Fuchs (2011), “Rogue Aid? The Determinants of China’s Aid Allocation.”

15. Characteristics of Chinese Aid (1)
Actors
Ministry of Commerce: main body
Ministry of Foreign Affairs
China Exim Bank (established in 1994): concessional loans and export credits
China Development Bank (established in 1994): commercial credits
Estimation of Size
In White Paper 2011, State Council
161 countries until 2009
billion yuan (US$38.54 billion)
41.4% as grants, 29.9% as interest-free loans, 28.7% as concessional loans
By other sources
2007 total aid budget to be US$1.83 billion
FT: China is the largest provider of overseas loans, at least US$ 110 billion in 2009 & 2010.

16. Characteristics of Chinese Aid (2)
Big projects
For example, textile mill in Burma (1956), Tanzania-Zambia railway line, sporting complex in Jordan (1990)
Five phase of China’s aid policy
First:
Consisted of grants and interest-free loans
Second:
In line with Mao Zedong’s claim ‘political leadership in the Third World’
China replaced Taiwan on UN Security Council (1971)
Third:
Deng Xiaoping’s ‘reform and opening up’
Fourth:
After Tiananmen Square incident
Fifth:
Aid reform of 1995 introduced market oriented principles
Emphasis on the linkage between aid, trade and investment
New Era with ‘new strategic partnership’ in 2006
First: Mainly by political and ideological considerations
Second: political support
Third: Economic consideration became more influential
Fourth: political & diplomatic support again?
Fifth: more economic consideration, especially for nergy security

17. Five Phases of China’s Aid
Geographical Distribution

18. Determinants of China’s aid allocation
Variables
Distance, population
‘new’ (small) donors give more aid to closer countries
Recipient Need
GDPpc, natural disasters
Political variables
Taiwan recognition & UN voting
Degree of democracy, institutional quality
Bad governance favored?
Or ‘principle of non-interference’
Commercial motives
Export & investment relationship
Natural resources
Oil production and other indicators

19. Regression Results by 5 phases (1)
Population, distance

20. Regression Results by 5 phases (2)
Recipient Need: GDPpc, disaters

21. Regression Results by 5 phases (3)
Democracy (dummy)

22. Regression Results by 5 phases (4)
Political interest: Taiwan recognition, UN voting

23. Regression Results by 5 phases (5)
Commercial interest: export, natural resources

24. Is China’s aid really different? (1)
Comparison with US, EU-3 (UK, France, Germany), ‘Good donors’ (Denmark, Netherlands, Norway, Sweden), Japan, Korea, and Arab donors (Saudi Arabia and Kuwait)
Distance: matters for all except China and US
Population: positive for western donors, negative for China only
Income level: matters for western donors and China with even larger marginal effect!
Political consideration or UN voting matters for most. China vs Japan
Export matters for most, with similar magnitude
Overall not very different but population variable…

25. Is China’s aid really different? (2)
With alternative indicators for institutional quality
EU-3, US, Japan favor good institutions
Emerging donors do not care much
China clearly does not take account of institutional quality

26. Is China’s aid really different? (3)
With alternative indicators for natural resource endowment
No evidence that China provides significantly more aid to countries with abundant natural resources.

27. Conclusion from the analysis
China’s aid allocation decisions are mainly shaped by politics.
But it is not exceptional compared to the DAC and other emerging donors.
Taiwan recognition & UN voting
Important drivers of China’s aid allocation decisions across all phase of its aid program
No evidence of China’s aid allocation inferior from a humanitarian point of view
Recipient need is also considered important.
Commercial interests are not significant.
China’s aid is independent of institutional characteristics.
No bias towards autocratic or corrupt regimes
In line with non-interference principle

28. Q & A