David Dollar

Growth is Good for the Poor

Average incomes of the poorest quintile rise proportionately with average incomes in a sample of 92 countries spanning the last four decades. This is because the share of income of the poorest quintile does not vary systematically with average income. It also does not vary with many of the policies and institutions that explain growth rates of average incomes, nor does it vary with measures of policies intended to benefit the poorest in society. This evidence emphasizes the importance of economic growth for poverty reduction.

Who Gives Foreign Aid to Whom and Why

This paper studies the pattern of allocation of foreign aid from various donors to receiving countries. We find considerable evidence that the direction of foreign aid is dictated as much by political and strategic considerations, as by the economic needs and policy performance of the recipients. Colonial past and political alliances are major determinants of foreign aid. At the margin, however, countries that democratize receive more aid, ceteris paribus. While foreign aid flows respond to political variables, foreign direct investments are more sensitive to economic incentives, particularly “good policies” and protection of property rights in the receiving countries. We also uncover significant differences in the behavior of different donors.

Outward-Oriented Developing Economies Really Do Grow More Rapidly: Evidence from 95 LDCs, 1976-1985

The long run trade orientation of an economy is measured in this article by an index which measures the extent to which the real exchange rate is distorted away from its free trade level by the trade regime. The technique for estimating a cross country index of real exchange rate distortion uses the international comparison of prices prepared by Robert Summers and Alan Heston. Resource endowment constitutes the norm and real overvaluation or undervaluation relative to this norm reveals whether incentives are directed to the domestic or international market. The index is constructed based on data for GDP/capita average price level in US dollars 1976-85 and GDP growth rate/capita 1976-85. Other sections are devoted the comparison of the procedure for 117 countries between 1976-85 and an examination of the empirical relationship between outward orientation and economic growth and sensitivity analysis. The results indicate that Latin America generally was overvalued by 33% relative to Asia and Africa was overvalued by 86%. The real exchange rate distortion index supports the view that Asian countries are more outward oriented. Asian economies have lower price levels which reflect relatively modest protection and incentives oriented to external markets. Latin American countries with moderately high price level and African countries with very high price levels reflect strong protection and incentives directed to production for the domestic market. An alternative specification which eliminates the dummy variables for Africa yields similar results with slightly lower magnitude; i.e. overvaluation is 60% instead of 86% for Africa and Latin America is overvalued by 39% instead of 33% over Asia. A table is provided which indicates by country the distortion and variability of the real exchange rate the GDP growth the 1976 GDP/capita and the investment rate. Another finding was that there is a significant negative relationship between distortion of the real exchange rate and growth of GDP/capita after controlling for the effects of real exchange rate variability and investment level with both the original specification and the alternative. The growth rate/capita of Latin American and African countries would increase 1.5-2.1% with a shift to move outward oriented trade policies. This gain as well as devaluation of the real exchange reate trade liberalization and maintenance of a stable real exchange rate would contribute to positive growth rates. In the analysis of the poorest 24 countries the result was that only rate distortion and not variability and investment rate explained the growth rate. The gain for Ghana for example of adopting the trade policies and exchange rate of Bangladesh would be 5% to its growth.

Aid Allocation and Poverty Reduction

The authors derive a poverty-efficient allocation of aid and compare it with actual aid allocations. They build the poverty-efficient allocation in two stages. First they use new World Bank ratings of 20 different aspects of national policy to establish the current relationship between aid, policies, and growth. Onto that, they add a mapping from growth to poverty reduction, which reflects the level and distribution of income. They compare the effects of using headcount and poverty-gap measures of poverty. They find the actual allocation of aid to be radically different from the poverty-efficient allocation. In the efficient allocation, for a given of poverty, aid tapers in with policy reform. In the actual allocation, aid tapers out with reform. In the efficient allocation, aid is targeted disproportionately to countries with severe poverty and adequate polices-the type of country where 74 percent of the worlds poor live. In the actual allocation, such countries receive a much smaller share of aid (56 percent) than their share of the worlds poor. With the present allocation, aid is effective in sustainably lifting about 30 million people a year out of absolute poverty. With a poverty-efficient allocation, this would increase to about 80 million people. Even with political constraints introduced to keep allocations for India and China constant, poverty reduction would increase to about 60 million. Reallocating aid is politically difficult, but it may be considerably less difficult than quadrupling aid budgets, which is what the authors estimate would be necessary to achieve the same impact on poverty reduction with existing aid allocations.

Institutions, trade, and growth ☆

Abstract Countries with better institutions and countries that trade more grow faster. Countries with better institutions also tend to trade more. These three stylized facts have been documented extensively. Here we investigate the partial effects of institutions and trade on growth. We argue that cross-country regressions of the log-level of per capita GDP on instrumented measures of trade and institutional quality are uninformative about the relative importance of trade and institutions in the long run, because of the very high correlation between the latter two variables. In contrast, regressions of changes in decadal growth rates on instrumented changes in trade and changes in institutional quality provide evidence of a significant effect of trade on growth, with a smaller role for improvements in institutions. These results are suggestive of an important joint role for both trade and institutions in the very long run, but a relatively larger role for trade over shorter horizons.

Are women really the "fairer" sex? Corruption and women in government

Abstract Numerous behavioral studies have found women to be more trust-worthy and public-spirited than men. These results suggest that women should be particularly effective in promoting honest government. Consistent with this hypothesis, we find that the greater the representation of women in parliament, the lower the level of corruption. We find this association in a large cross-section of countries; the result is robust to a wide range of specifications.

Can the World Cut Poverty in Half? How Policy Reform and Effective Aid Can Meet International Development Goals

Poverty in the developing world will decline by roughly half by 2015 if current growth trends and policies persist. But a disproportionate share of poverty reduction will occur in East and South Asia, poverty will decline only slightly in Sub-Saharan Africa, and it will increase in Eastern Europe and Central Asia. What can be done to change this picture? More effective development aid could greatly improve poverty reduction in the areas where poverty reduction is expected to lag: Sub-Saharan Africa, Eastern Europe, and Central Asia. Even more potent would be significant policy reform in the countries themselves. Collier and Dollar develop a model of efficient aid in which the total volume of aid is endogenous. In particular, aid flows respond to policy improvements that create a better environment for poverty reduction and effective use of aid. They use the model to investigate scenarios - of policy reform, of more efficient aid, and of greater volumes of aid - that point the way to how the world could cut poverty in half in every major region. The fact that aid increases the benefits of reform suggests that a high level of aid to strong reformers may increase the likelihood of sustained good policy (an idea ratified in several recent case studies of low-income reformers). Collier and Dollar find that the world is not operating on the efficiency frontier. With the same level of concern, much more poverty reduction could be achieved by allocating aid on the basis of how poor countries are as well as on the basis of the quality of their policies. Global poverty reduction requires a partnership in which third world countries and governments improve economic policy while first world citizens and governments show concern about poverty and translate that concern into effective assistance. This paper - a product of the Development Research Group - is part of a larger effort in the group to study aid effectiveness. The authors may be contacted at pcollier@worldbank.org or ddollar@worldbank.org.

Investment Climate and Firm Performance in Developing Economies

Drawing on recently completed firm‐level surveys in Bangladesh, China, India, and Pakistan, this article investigates the relationship between the investment climate and firm performance. These standardized surveys of large, random samples of firms in common sectors reveal that objective measures of the investment climate vary significantly across countries and across locations within these countries. We focus primarily on measures of the time or monetary cost of different bottlenecks (e.g., days to clear goods through customs, days to get a telephone line, and sales lost to power outages). For many of these costs, the obstacles are lower in China than in Bangladesh or India, which in turn are higher than in Pakistan. There is also systematic variation across cities within countries. We estimate a production function for garment firms and show that total factor productivity is systematically related to the investment climate indicators. Factor returns (wages for a given quality of human capital and rate of profit) are also higher where investment climate is better. These higher returns then have dynamic effects: accumulation and growth at the firm level are higher where the investment climate is better.

Aid, Policies, and Growth: Reply

In Burnside and Dollar (2000) we used standard regression techniques from the growth literature to measure the effect of foreign aid on growth. The main finding in our paper was that the effect of foreign aid on growth depended on the macroeconomic policies of recipient countries. In this issue, William Easterly et al. (2004), challenge the robustness of our result to new data. Before commenting on their findings it is useful to review the basis of our original findings. Our paper focused on three versions of a panel growth regression, estimated using data for 51 countries, and six four-year periods, from 1970 to 1993. These regressions may be summarized as:

Institutions, trade, and growth : revisiting the evidence

Several recent papers have attempted to identify the partial effects of trade integration and institutional quality on long-run growth using the geographical determinants of trade and the historical determinants of institutions as instruments. The authors show that many of the specifications in these papers are weaklyidentified despite the apparently good performance of the instruments in first-stage regressions. Consequently, they argue that the cross-country variation in institutions, trade, and their geographical and historical determinants is not very informative about the partial effects of these variables on long-run growth.