George Mavrotas

FDI and Growth: What Causes What?

This paper examines the causal relationship between FDI and economic growth by using an innovative econometric methodology to study the direction of causality between the two variables. We apply our methodology, based on the Toda-Yamamoto test for causality, to time-series data covering the period 1969-2000 for three developing countries, namely Chile, Malaysia and Thailand, all of them major recipients of FDI with a different history of macroeconomic episodes, policy regimes and growth patterns. Our empirical findings clearly suggest that it is GDP that causes FDI in the case of Chile and not vice versa, while for both Malaysia and Thailand, there is a strong evidence of a bi-directional causality between the two variables. The robustness of the above findings is confirmed by the use of a bootstrap test employed to test the validity of our results. Copyright United Nations University 2006.

Foreign aid and fiscal response: Does aid disaggregation matter?

Foreign Aid and Fiscal Response: Does Aid Disaggregation Matter? —The present paper constitutes a new approach in the aid-effectiveness literature in two important respects. Firstly, it develops and then tests a model of foreign aid and fiscal response, which, for the first time in the aid-effectiveness literature, embraces the aiddisaggregation issue; we do this by disaggregating aid flows into three main components, namely programme aid, project aid and technical assistance, and by subsequently estimating our model for two countries, India and Kenya. Secondly, on the modelling front, we improve on earlier work in this area by using an appropriate specification for the recipient-country government’s welfare function, with significant positive implications for the empirical findings obtained. This new approach adopted in the paper and the empirical results obtained may have important implications for a better understanding of the fiscal impact of aid in aid-recipient countries.

Aid and Growth in India: Some Evidence from Disaggregated Aid Data

The article focuses on the impact of aid on growth by using a new approach in the aid-effectiveness literature related to the composition of foreign aid. We present a model of the impact of aid on growth in an aid-recipient economy to derive a reduced-form growth equation, which is subsequently estimated by using time- series data for India over the period 1970-92. The paper improves upon earlier work in the area of aid effectiveness by focusing on a neglected, though important issue, namely the aid-disaggregation and the way it affects the empirics of aid effec tiveness. Disaggregated aid data has been constructed by the OECD to test the rel evance of the aid-disaggregation hypothesis to aid effectiveness for India. Furthermore, the paper employs modern time-series econometric analysis based on general-to-specific modelling and co-integration to shed more light on a highly debatable topic. The empirical results obtained seem to suggest that the composi tion of aid matters for deriving robust conclusions on aid effectiveness in the case of India; at the same time, they seem to call for further work in this promising area within the context of more individual country studies.

Savings and Financial Sector Development: Panel Cointegration Evidence from Africa

The paper uses different measures of financial sector development (FSD) for a dynamic heterogeneous panel of 17 African countries to examine the impact of FSD on private savings. An innovative econometric methodology is also employed related to a series of cointegration tests within a panel. This is an important contribution, since traditional panel data analysis adopted in previous studies suffers from serious heterogeneity bias problems. The empirical results obtained vary considerably among countries in the panel, thus highlighting the importance of using different measures of FSD rather than a single indicator. The evidence is rather inconclusive, although in most of the countries in the sample, a positive relationship between FSD and private savings seems to hold. The empirical analysis also suggests that a change in government savings is offset by an opposite change in private savings in most of the countries in the panel, thus confirming the Ricardian equivalence hypothesis. Liquidity constraints do not seem to play a vital role in most of the African countries in the group, since the relevant coefficient is negative and significant in only a small group of countries.

Natural Resource Dependence and Economic Performance in the 1970–2000 Period

We look at the type of natural resource dependence and growth in developing countries. Certain natural resources called point-source, such as oil and minerals, exhibit concentrated and capturable revenue patterns, while revenue flows from resources such as agriculture are more diffused. Developing countries that export the former type of products are regarded prone to growth failure due to institutional failure. We present an explicit model of growth collapse with micro-foundations in rent-seeking contests with increasing returns. Our econometric analysis is among the few in this literature with a panel data dimension. Point-source-type natural resource dependence does retard institutional development in both governance and democracy, which hampers growth. The resource curse, however, is more general and not simply confined to mineral exporters.

Aid Allocation and Aid Effectiveness: An Empirical Analysis

Why do some poor countries receive so much aid, and others so little? Humanitarian, commercial, political and strategic motives are usually identified as the main factors driving the aid allocation process. This is consistent with policy statements, especially from the major donors, which assert that aid is motivated by a humanitarian concern to promote development and alleviate need, especially in the most deprived countries, but at the same time also by commercial, political and strategic self-interest. The vast empirical literature dealing with the determinants of aid allocation clearly concludes that donors pursue political, economic and strategic interests in inter-country aid allocation, especially with regard to bilateral aid allocation of the larger donors, and that developmental or humanitarian concerns, such as the reduction of poverty, receive a relatively low or even zero weight in this process (see McGillivray, 2004, for a comprehensive discussion).

Development Finance in the Global Economy: The Road Ahead

Today, large volumes of global savings move through an increasingly integrated global capital market in search of investment opportunities. Capital is abundant. The developing world is receiving an increasing share of these flows, to the benefit of private investment — in production, trade and infrastructure — as well as to the balance of payments (with foreign direct investment (FDI) providing the most stable form of capital flow). Running alongside this story of private capital flow is one of increased official flows, official development assistance (ODA) having rebounded since its mid-1990s slump. And the flows of private and official capital run together at times, as with the international finance facility (IFF) which aims to leverage and front-load ODA by borrowing from international capital markets. The IFF, together with the French airline tax and proposals for global environmental taxes, the currency transaction tax (CTT) and the Global Premium Bond, constitute the new class of innovative financing mechanisms. Last, but certainly not least, the new philanthropy (increasingly in partnership with development agencies) is adding considerably to already well-established and growing flows from the charitable sector — and this source of capital has an especially close relationship with the goal of reducing poverty.

Financial Development, Institutions, Growth and Poverty Reduction

Introduction and Overview B.Guha-Khasnobis & G.Mavrotas Sources and Effectiveness of Financial Development: What We Know and What We Need to Know P.Demetriades & S.Andrianova The Poverty Macroeconomic Policy Nexus: Some Short-Run Analytics G.Mavrotas & S.M.Murshed Finance and Poverty in Ethiopia: A Household Level Analysis A.Geda, A.Shimeles & D.Zerfu Financial Sector Development, Savings Mobilization and Poverty Reduction in Ghana P.Quartey Finance and Growth: An Empirical Assessment of the Indian Economy P.K.Das & B.Guha-Khasnobis The Impact of Financial Openness on Economic Integration: Evidence from Europe and the CIS F.Carmignani & A.Chowdhury Does Financial Liberalization Influence Saving, Investment and Growth? Evidence from 25 Emerging Market Economies, 1973-1996 N.Hermes & R.Lensink The Corporate Debt Market in India: An Analytical Study of Macroeconomic and Institutional Issues B.Guha-Khasnobis & S.Kar Financial Markets and R&D Investments: A Discrete Time Model to Interpret Public Policies M.Mazzoli Financial Sector Development and Total Factor Productivity Growth S.Kumbhakar & G.Mavrotas The Effects of Regional Integration: Impact on Real Effective Exchange Rate Volatility, Institutional Quality and Growth for MENA Countries L.Becchetti & I.Hasan

Domestic Resource Mobilization and Financial Development

Domestic Resource Mobilization and Financial Development: Introduction G.Mavrotas Stock Market Development and Economic Growth S.Capasso Financial Development and Growth: Evidence from Panel Data Models G.Mavrotas & S-I.Son Excess Credit and the South Korean Crisis P.Demetriades & B.Fattouh Financial Sector Development and Growth: The Chinese Experience I.Hasan & M.Zhou Institutional Analysis of Financial Market Fragmentation in Sub-Saharan Africa: A Risk-Cost Configuration Approach M.Nissanke & E.Aryeetey Financial Reform and the Mobilization of Domestic Savings: The Experience of Morocco M.Baliamoune-Lutz The Structure and Performance of Ethiopias Financial Sector in the Pre- and Post Reform Periods A.Geda Financial Sector Development in Zambia: Implications for Domestic Resource Mobilization S.Maimbo & G.Mavrotas The Determinants of Loan Contracts to Business Firms: Empirical Evidence from a Private Bank in Vietnam P.T.T.Tra & R.Lensink

Public fiscal behaviour & aid heterogeneity in aid-recipient economies

The paper develops a model of public fiscal behaviour of the aid-recipient government in the presence of both endogenous and heterogeneous foreign aid. We endogenize aid on the grounds that the recipient government has some influence over aid disbursements. Regarding aid heterogeneity, it is argued that each of the main four categories of aid, namely project aid, programme aid, technical assistance and food aid may exert different effects on the recipient economy. Furthermore, in case the preferences of the aid-recipient government are higher for some of these types of aid, neglecting aid heterogeneity would lead to aggregation bias in the results and conclusions. The model adds an important new dimension to the vast aid effectiveness literature and calls for further modelling as well as empirical work in this promising research area so that significant policy implications can be derived.