the theory and practice of foreign aid dr. boris begović president of the center for...
Post on 26-Dec-2015
215 Views
Preview:
TRANSCRIPT
THE THEORY AND PRACTICE OF FOREIGN AID
Dr. Boris Begović
President of the Center for Liberal-Democratic Studies (CLDS)Professor of economics at the School of Law, University of Belgrade, Serbia
Analyzing foreign aid
• Normative analysis
• What is the rationale for foreign aid?
• Positive analysis
• What are the reasons why countries give foreign aid?
• Mechanisms of foreign aid
• Empirical results of the aid effects
Normative analysis: Poverty traps
• Vicious circle mechanism of poverty traps
• Poverty Low Savings and Investment Low Growth Rate Poverty (again)➔ ➔ ➔
• Described by Rosenstein-Rodan (1943), Rostow (1960), Sachs (2005)
• Similar two-gap growth model
• Low savings and hard currency gaps prevent dynamic growth in developing countries
• Key assumption in poverty trap theories
• Imperfection of international capital markets
• Appeal of foreign aid
• Simplicity of aid as an investment substitute
• Presumption of sustainability of growth once a country leaves poverty trap (Walt Rostow’s “take-off”)
Poverty traps are the main rationale for foreign aid
Do poverty traps really exist?
• Some remain unconvinced: So what if poverty traps don’t exist? Increased investment through foreign aid is still good
• This rationale implies solving a problem without understanding its causes
• The crucial issues of increased investment
• Project selection
• Commitment of investors
• Efficiency of investment
• Kraay and Raddatz (2007) offered an empirical refutation of poverty traps
For poverty traps to exist, subsistence levels across countries must be different – but they are the same
Positive analysis
• Supply side: Why donor countries give foreign aid?
• Alesina and Dollar (2000) show political considerations, e.g., 57% of France’s aid goes to its former colonies
• Kuziemko and Werker (2006) link aid to political support from recipient countries, e.g., U.N. Security Council membership increases aid from the U.S. by 59%
• Donors are not responsive to public policies of recipient countries, both good and bad
• Alesina and Weder (2002) show no link between the level of corruption and aid
• Demand side: Why countries receive foreign aid?
• Tornell and Lane (1999) demonstrate a voracity effect: the more aid you get, the more aid you need
Mechanisms of foreign aid: Funding of investment projects
• Weaknesses of this rationale for aid
• Marginal productivity (efficiency) is smaller than in investments funded by private capital
• No market criteria for investment project selection or demanded rate of return
• Issues of accountability in foreign aid
• Investors not accountable to the recipient country constituency
• More accountable to constituencies in donor countries, but those constituencies have no immediate interest in efficiency of aid projects
Mechanisms of foreign aid: Budgetary support
• Weaknesses of this rationale for aid
• The claim: aid reduces tax burden while keeping budgetary balance increases private investment
• BUT this depends on the model of behavior of recipient governments
• Boone (1996): models of behavior
• Elitist government
• Egalitarian government
• Government oriented toward free market
Budgetary support leads to increased public expenditure with the same or bigger tax burden and no increased
private investment
Empirical results: The bigger aid, the smaller growth rate
ENDING
top related