Oliver Morrissey

Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid

Summary Aid has been the principal source of development finance for the majority of developing countries over the past few decades. This has spawned a large literature on the effectiveness of aid, which remains essentially inconclusive. The empirical literature has tended to evaluate the impact of aid by including it as a variable in a regression for the determinants of some economic performance indicator. This paper follows a different strand of the literature and examines the impact of aid on public sector fiscal behavior. Aid is in general given to the public sector, thus any effect of aid is mediated by that sector. We specifically address this behavioral feature by analyzing how aid revenue affects government fiscal behavior with respect to tax, borrowing and expenditure decisions; unlike previous contributions, aid is endogenous in our model, which has a number of important implications. We estimate an econometric model that differs from previous studies not only in this respect but also by allowing domestic borrowing, in addition to aid and tax revenue, to finance both capital and recurrent expenditure. Structural and reduced form equations are derived and estimated using 1956–95 time-series data for Pakistan. Results indicate, contrary to much of the literature, that only half of aid has gone to government consumption, that it has had a slightly positive impact on public investment and negative impact on tax effort.

Foreign Direct Investment: Flows, Volatility, and the Impact on Growth

This paper contributes to the literature on FDI and economic growth. We deviate from previous studies by introducing measures of the volatility of FDI inflows. As introduced into the model, these are predicted to have a negative effect on growth. We estimate the standard model using cross-section, panel data, and instrumental variable techniques. Whilst all results are not entirely robust, there is a consistent finding that volatility of FDI has a negative impact on growth. The evidence for a positive effect of FDI levels on growth is not robust, nor is that for any effect of human capital.

Does aid increase growth

Is aid effective in increasing growth rates of recipient countries? This is the burning question in any economic evaluation of aid effectiveness, yet there is no consensus on the answer. Recent advances in growth theory help us to identify the various mechanisms by which aid can increase growth, notably through increasing investment in physical and human capital. The empirical evidence has tended to focus on aid effectiveness by examining its impact as (physical) investment and, more recently, by considering the relationship between aid and government economic policy. There is an increasing body of evidence that aid does work, conditional on other variables in the growth regression.

Aid fungibility in assessing aid: red herring or true concern?

This paper critically reviews Assessing Aid (World Bank, 1998), focussing on Chapter 3, which looks at public sector aspects of aid, specifically the issue of aid fungibility. Whilst Assessing Aids focus on public sector aspects of aid is highly appropriate, it is based on a partial review of the literature and draws conclusions not entirely supported by the literature. We argue that fungibility itself is not an important concern, and distracts attention from what donors can do to ensure that more of their aid is allocated to areas that they want to support. Insufficient attention is paid to how aid impacts on public sector behaviour overall and how fiscal management can be improved. Copyright

Aid, public spending and human welfare: evidence from quantile regressions

Does aid contribute to human development other than by increasing growth? In doing so, is aid more or less effective in poorer countries (those with low levels of aggregate welfare)? This paper addresses these issues, assessing if there is cross-country aggregate evidence for an effect of aid on welfare levels. We posit that aid can enhance human development by financing public expenditures that increase welfare indicators. Using quantile regressions, we report evidence that aid is associated with higher human development (the Human Development Index) and lower infant mortality (both indicators of aggregate welfare). Where there are differences across quantiles, aid is more effective in countries below the median of the welfare distribution, i.e. with lower levels of human development. Insofar as aggregate welfare is (inversely) correlated with poverty, we find evidence that aid can make a positive contribution to alleviating poverty, and that the effect appears to be greater in countries with lower levels of human development indicators. Copyright

FOREIGN DIRECT INVESTMENT, SKILLS AND WAGE INEQUALITY IN EAST ASIA

Foreign direct investment (FDI) can affect the levelanddispersion of wages, but there is a lack of empirical work in this area. This paper tests for the effects of FDI on wages and wage inequality in five East Asian countries. Wage inequality has been low and decreasing in some, but not all, East Asian countries. Using ILO data for wages and employment by occupation, we do not find strong evidence that FDI reduced wage inequality in five East Asian countries over the period 1985–98. Indeed, controlling for domestic influences (wage setting, supply of skills) we find that FDI has raised wage inequality in Thailand. Because we also find that FDI raises the wages for both skilled and low-skilled workers, our findings should help to move the debate from impact (does FDI contribute to growth and development?) to appropriate policies to utilize FDI (how can we make FDI work for all?). We suggest that the education system in Thailand has not been sufficiently oriented to maximize the benefits from FDI. Countries wanting to develop on the basis of FDI should invest sufficient resources in good quality and appropriate human resources, or otherwise face the possibility that growth coincides with rising wage inequality.

Policy and Non-Policy Barriers to Trade and Implicit Taxation of Exports in Uganda

Uganda has made significant progress in reducing policy-induced anti-export bias in its trade policy in the 1990s. Taxes on exports have been abolished, and import protection has been reduced considerably. Such trade barriers are only a component of thee transaction costs associated with trade. Poor infrastructure, notably by increasing transport costs, and institutional inefficiencies can significantly increase trade costs. The effective protection of imports, and implicit tax on exports, due to transport costs is calculated and compared to effective protection due to trade policy barriers for Uganda. The results reveal that transport costs are often very high, in many cases representing a greater cost (tax) to exporters than trade policy.

CONDITIONALITY WHEN DONOR AND RECIPIENT PREFERENCES VARY

An extensive literature evaluates the content of conditionality, but the design of conditionality has received less attention. This paper presents a general framework of conditionality, which allows donor and recipient preferences for policy reform and aid to vary, in which previous contributions are incorporated as specific cases. The general approach allows for conditionality as bargaining between donors and recipients: cases where donors impose conditions on unwilling recipients; cases where recipients are willing but unable to implement all conditions; and situations where recipients and donors are clearly in conflict. Ex ante conditionality is shown to be ineffective in promoting reform in all cases and often counter-productive, either inhibiting the reform efforts of sincere governments or undermining its own credibility by encouraging donors to condone slippage.

Does Aid Create Trade? An Investigation for European Donors and African Recipients

This article has a simple aim – to demonstrate that an empirical link between aid and trade may exist (for some donor-recipient pairs), but that the nature of this linkage is complex and can take a variety of forms. We challenge the commonly made assertion that aid creates trade. Theoretical considerations can be used to justify a link from aid to trade, from trade to aid, or in both directions together. Indeed, there may be no empirical linkage at all. We examine data on aid and trade flows for a sample of four European donors and 26 African recipients over 1969-95. Three broad findings emerge. First, a statistical link between aid and trade, of whatever form, is the exception rather than the norm. Second, there is very little evidence that aid creates trade; this argument for tied aid is unproven on our analysis of aggregate bilateral flows. Third, France, unlike the other donors examined, does appear more likely to use trade links as a criterion in determining aid allocations.

Searching for Aid Threshold Effects

Is aid subject to diminishing returns? This paper addresses this issue, thereby contributing to the literature on effective allocation of aid. We test the hypothesis of diminishing returns to aid. Using an appropriate econometric technique for detecting thresholds, we find that aid only becomes effective (in contributing to growth) beyond a critical level (two per cent of GNP), and we find no evidence of diminishing returns to aid. Indeed, aid appears to be most effective when the level is high in countries with relatively low levels of human capital, suggesting that aid is more effective in countries at lower levels of development.