1. 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

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

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

21. 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

22. 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

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

24. 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

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

26. 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

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

28. 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

29. 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

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

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