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Aid, Policy and Growth: Does Aid Modality Matter?

Author(s): Bazoumana Ouattara and Eric Strobl


Source: Review of World Economics / Weltwirtschaftliches Archiv, Vol. 144, No. 2 (July
2008), pp. 347-365
Published by: Springer
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Aid, Policyand Growth:Does Aid Modality


Matter?
BazoumanaOuattaraandEricStrobl
Paris
University
of WalesSwansea; cole Polytechnique

Abstract:
Thispapercontributes
to theempiricsof aid and growthbyinvestigataid modality
in explaining
Forthispurpose,
matters
itseffectiveness.
ingwhether
we includethefourmainaid modalities(projectaid,financial
programaid,technicalassistancegrants,and foodaid) as explanatory
variablesin an endogenous
and significantly
model.We findthatprojectaid affects
growth
positively
growth,
albeitwithdiminishing
returns.
Our resultsalso showthatfinancial
programaid
whiletheimpactsof technicalassistance
impactson growthnegatively,
generally
and foodaid are statistically
we findthatclimaterelated
Moreover,
insignificant.
conditions
influence
theeffect
ofprojectaid. JELno. C2, F3
Aid;growth;
Keywords:
dynamicpanelmethods

1 Introduction
The roleofforeign
aid in fostering
in
economicgrowthand development
countries
continues
to
a
makers
be
of
debate
poor
subject
amongpolicy
and researchers.
Thisdebatehas becomeimportant
in thelightofthedein meetingthe
the
international
velopment
challenges
community
facing
Millennium
the
Goals
ConferIndeed,
(MDGs).
Development
Monterrey
ence organizedby the UnitedNationsin 2002 was held to findwaysin
whichtheinternational
can addressthemeansand constraints
community
topoverty
reduction
and to stresstheroleoftheinternationally
agreeddeas
a
tool
to
measure
toward
these
The
velopment
goals
objectives.
progress
of
aid
has
been
the
Consensus
scalingup foreign
by Monterrey
highlighted
as one of theimportant
toolsto achievethenew development
financing
goals.
therearestillsomescepticisms
theeffectiveness
of
However,
regarding
aid. Indeed,thequestion"Does aid work?"(Cassen 1994) has led to little
Remark:Thanks to D. Roodman for sending the Stata codes used to compute some of the
regressions,and an anonymous refereefor constructivecomments. Please address correspondence to Eric Strobl,Departmentof Economics, Ecole Polytechnique,91128 Palaiseau
Cedex, France; e-mail: eric.strobl^shs.polytechnique.fr
2008 Kiel Institute

DOT: 10.1007/s10290-008-0150-3

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348

Reviewof WorldEconomics2008,Vol. 144 (2)

resolution.Earlierstudiesfoundtherelationshipbetweenaid and growthto


be inconclusive(Papanek 1973; Voivodas 1973; Mosley 1980; Mosley etal.
1987; Boone 1994). More recentstudiesseem to, in contrast,agreethataid
does exerta positiveimpact on growth.However,thereis a disagreement
on how thispositiveimpactis achieved.For Burnsideand Dollar (2000) the
positiveimpact of aid on growthis conditionalon the policyenvironment
of the recipientcountry.In practicalterms,thismeans thatcountrieswith
low inflation,low budgetdeficit,and more open economies are more likely
to benefitfromreceivingaid than countrieswho exhibitopposite policies.
The findingthat aid worksbetterin countrieswith betterpolicy regimes
was also confirmedby otherinvestigators(Collier and Dollar 2001, 2002;
Collier and Dehn 2001; Collier and Hoeffler2002). However,therealso
existsevidenceto suggesttheworkingofaid is not contingenton thepolicy
variable
environmentoftherecipientcountry.1
UsingBayesianinstrumental
find
that
also
the
interaction
term
and
Mavrotas
(2006)
techniquesAntipin
is not statisticallysignificant,thus castingfurtherdoubt on the Burnside
and Dollar (2000) findingsand policy recommendations.2However,one
study(Rajan and Subramanian 2005a), aftercontrollingforthe bias that
aid goes to poorer countriesor to countriesafterpoor performance,finds
littlerobust evidence of a statisticallysignificanteffectbetween aid and
growth.Moreover,the authors findno evidence that aid worksbetterin
good policyenvironmentor in countriesoutside thetropics.
The currentpaper contributesto the aid-growthliteratureby assessing
the effectiveness
of various aid modalities.In particularthe studyseeks to
whether
project financingor budget financing(financialproinvestigate
in stimulatinggrowth.Additionally,the paper
effective
is
more
gram aid)
ofthenonfinancialcomponentofaid namelytechlooks at thegrowtheffect
nical assistancegrantsand programfood aid. The rationaleforassessing
the individualeffectof aid componentsis based on severalfactors.Firstly,
aid is heterogeneousin nature and each of its components,potentially,
macroeconomiceffectson the recipienteconomy.Conseexerta different
quently,using aggregateaid figures,as done in the vast majorityof the aid
1 See
etal. (1998),Hansenand Tarp(2000,2001),Dalgaardand Hansen(2001),
Durbarry
etal. (2004), DalLensinkand White(2001), Chauvetand Guillaumont(2002), Easterly
gaardet al. (2004).
2 The authorsalso raisedissues
the econometric
adoptedby the
methodology
regarding
studies.However,suchdiscussionis beyondthescopeof
vastmajority
of theaid-growth
theimportance
of aid disaggregation
thepresentpaper.Our mainaim is to highlight
(by
functional
widelyadoptedin theexisting
techniques
specification)
usingtheeconometric
can be made.
aid-growth
literature
so thatdirectcomparisons

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Ouattara/Strobl:Aid, Policy and Growth:Does Aid Modality Matter?

349

would failto disentangletheseindividualeffects,


literature,
therebyleading
to an aggregationbias in the findings.3Secondly,as pointed by Mavrotas
conditions
(2005), and Mavrotasand Ouattara (2006a), thereare different
countries (for example,
relatingto each of the aid categoriesin different
the state of aid coordination may differin each country); thus it makes
sense to expectaid to exerta different
effectin each country.Thirdly,ifthe
of
each
of
the
proportion
components of aid is changingover time then
aid heterogeneity
should be takeninto account in the econometricanalysis
(Mavrotas2005).
As faras theempiricalevidenceis concernedspecificcountrystudiesapFor example,Mavrotas
pear to supporttheargumentforaid heterogeneity.
aid to India intoprogramaid, projectaid, and techni(2002a) disaggregates
cal assistancegrantsand findsthatall threetypesaffectedgrowthnegatively
duringthe 1970-1992 period. Moreover,some of the literatureexamining
theimpactof different
typesof aid on aspectsotherthan economic growth
also suggeststhat aid heterogeneityis important.For example, applying
a fiscalresponsemodel to Uganda and Cte d'Ivoire,respectively,
Mavrotas
and
find
that
the
different
Mavrotas
and
Ouattara
(2005)
(2006a)
categories
ofaid have different
effectson thepublic sectorfiscalvariables.Also, Ouattara (2007) findsthatin generalprojectaid flowsto Cte d'Ivoire tend to
reduce public savings and raise dependence on aid more than the other
categoriesof aid flows.
Since thesecountrystudies suggestthataid disaggregationmattersfor
growth,thereclearlyis a need to substantiatethis findingon a more comprehensivecross-countrybasis. Clemens et al. (2004) divide aid into three
categories:(i) emergencyand humanitarianaid, (ii) aid to supportdemocracy,the environment,health,or education, and (iii) aid forbudget and
and forthe
balance of paymentsupport,investmentsand infrastructure,
reproductivesector such as agricultureand industry.They find that the
last categoryof aid exertsa significantimpact on economic growth(with
diminishingreturns).The rationaleforclassifyingaid components under
theseheadings,accordingto the authors,is thatthe firsttype of aid tends
to be negativelycorrelatedwith growth,the second group tends to affect
growthin the long run, and the thirdcategorytends to affectgrowthin
the shortrun. Althoughthistypeof classificationis usefulin assessingthe
effectiveness
of aid, it raises two questions, albeit related.Firstly,how do
3 See Cassen
(1994), White (1998), Mavrotas (2002a, 2002b), Clemens et al. (2004), Mavrotas (2005), Mavrotas and Ouattara (2006a, 2006b).

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350

ReviewofWorldEconomics2008,Vol. 144 (2)

we know a prioriwhattypeof aid affectsgrowthnegatively?


Secondly,who
in
aid
measures
work
the
"short
run" versus
a
which
knows
really
priori
and
find
that
What
is
Subramanian
none of
run"?
more,
(2005a)
Rajan
"long
al.
et
exert
Clemens
the sub-categoriessuggestedby
(2004)
anystatistically
significantimpacton economic growth,aftercontrollingforpoor-country
bias.
or poor-performer
Cordelia and DelTAricicia (2003) use a less arbitrarydisaggregation
approach. They examine the effectof disaggregatedaid commitments(in
the formof budget support and project aid) on growthin the contextof
impact
panel studiesand findthatbothtypesofaid do notexerta significant
on growth,whileit is onlywhen interactedwiththepolicyvariablethatthe
impact of program aid on growthbecomes positive and significantand
the impact of project aid remainsinsignificant.
However,theirstudyuses
commitment,ratherthan disbursement,values of aid, which are known
to be unreliable for measuring aid flows to developing countries. More
precisely,in practicenot all aid commitmentsare disbursedand, therefore,
theiruse to estimatethe impact of aid on the recipienteconomycould be
misleading.4Commitmentfigureswould be appropriateifone is lookingat
thefactorsthatdetermineaid allocation.However,to studytheeffectiveness
of aid (on the recipienteconomy) one should ratherlook at the amount
actually disbursed,i.e., that reachingthe recipient'seconomy. It should
be noted in this regardthat the standardpracticein the aid effectiveness
literatureis to use net disbursementfigures.
Also,usinga different
disaggregationapproach,Rajan and Subramanian
(2005b) examinetheeffectof aid (net of technicalassistance)and technical
assistanceon labour-intensiveindustriesfora panel of countriesover the
period 1960-2000. Theirfindingsshow thataid (net oftechnicalassistance)
exertsa negativeand statistically
significantimpacton labour-intensiveindustries.When theyuse technicalassistanceas theaid measurethenegative
for
and significantimpact stillremains(althoughthe estimatedcoefficient
aid becomes smallerin absolutevalue).
In thispaper we thusexplicitlyexaminethe impactof different
typesof
aid disbursementson economic growthin a cross-countrygrowthframework. Our disaggregationcriteriais based on the way donors disbursed
our aim is to investigatewhetherthe different
theirfunds.Put differently,
effectson
modalitiesused bydonors to financedevelopmentexertdifferent
more
effective.
to
be
And
if
which
do,
they
typeappears
growth.
4 The amountdisbursedis in somecases50
percentof thetotalcommitment.

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Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?

351

Ourpaperis organizedas follows.


Section2 describesthemethodology
andthedata.Section3 presents
theresults.
remarks
areprovided
Concluding
in Section4.
2 Methodologyand Data Issues
2.1 Specification
of the GrowthEquation
Inhissurvey
andexamination
oftherecent
aidandgrowth
studiesRoodman
The first
(2004) arguesthatthreemainstoriesemergefromthisliterature.
storyis the one told by Burnsideand Dollar (2000), i.e., aid worksin
countries
withsoundpolicies.The secondstoryis thatofHansenand Tarp
who
foundthaton averageforeignaid affects
(2001)
growthpositively
and significantly
and thiseffectis not contingent
on policy.The third
storyis thatof Daalgardetal. (2004) who foundthatforeignaid works
betterin countries
outsidethetropics.Roodman(2004), aftersubmitting
thesethreespecifications
to a battery
oftests,concludesthattheworking
of aid conditionalon policyis theweakestof all specifications
whilethe
that"aid worksbetterin countriesoutsidethe tropics"appears
finding
to be themostrobust.The presentpaperwill,therefore,
testthesethree
mainspecifications
Roodman
(2004) usingdisaggregated
by
highlighted
aid data.5The basic specification
adoptedin thesethreestudiescan be
reduced-form
represented
bythefollowing
equation:
( 1)
git= ota+ Xit+ SAidit+ eit,
whereg represents
thegrowthrateofGDP percapita,X is a setofcontrol
Aidis thesetformedbythedifferent
offoreign
variables,
aid,
components
s is an i.i.d.residualterm.
2.2 The Data
For all variablesexceptour aid measures,we use theexactdata set as in
Roodman(2004)6,whichis an expandeddatasetoftheoriginalone used
etal. (2004). These data containa numberof time-invariant
by Easterly
5 It is
to stressthatwe use thesegrowthmodelsto testtheaid-growth
nexus
important
in orderto makeour resultsdirectly
comparableto the abovethreestudies.However,as
we pointout in theconclusionthesetypesof growthmodelsare restrictive.
6 See thedata setconstruction
in TableAl in theAppendix.

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352

Reviewof WorldEconomics2008,Vol. 144 (2)

and timevaryingvariables,wherethe timevaryingvariablesare averaged overfouryearperiodsfrom1974 to 2001.7The data on technical


assistanceand foodaid are obtainedfromtheOECD-DAC onlinestatistics.The data on projectaid and financialprogramaid disbursements
the authorconstructed
are obtainedfromOuattara(2005). Specifically,
a newdatabaseon projectand programaid (netdisbursements)
byconthe
commitment
values
in
the
OECD-Credit
verting
ReportingSystem
into disbursements.8
The authordid so by firstderivingthe respective
in total(projectaid
shareof projectaid and programaid commitments
+ program)commitments
obtainedfromtheOECD-CRS database.These
sharesare thenappliedto thetotalof ODA (OfficalDevelopmentAssistence)disbursements
(less technicalassistancegrants).The obtainedfigaid disbursements
uresgiveprojectaid disbursements
andprogram
(which
includeprogramfood aid). To obtainfinancialprogramaid disbursementvalues,programfoodaid disbursement
whichexistin the
figures,
fromtheprogramaid disbursement
OECD-DAC database,are subtracted
values.9
23 Econometric
Method
In estimating
the growthequation(1) Burnsideand Dollar (2000) have
and the 2SLS techniqueswhereforthe latterall variables
OLS
adopted
Hansenand Tarp(2001) and
inX areassumedto be exogenous.However,
Daalgardetal. (2004) pointoutthatmanyofthevariablesinX arelikelyto
be endogenous.Moreimportantly,
one can easilymakean argument
that
with
evenifaid itselfis contemporaneously
to
predetermined regard the
it
intotime
still
be
rate, may
growth
endogenoussimplybyitsconstruction
etal.
averagesas is done in theBurnsideand Dollar (2000) and Easterly
thepolicy
(2004) data sets.Whatis more,thevariablesused to construct
measurearealso likelyto be endogenous(see Daalgardetal. 2004).
In orderto avoidbiasedestimatesresulting
fromusingOLS or 2SLS
etal. (2004), we thusfollow
as Burnsideand Dollar (2000) and Easterly
7
are onlyavailablesince1974.
Projectand programaid commitment
figures
5 One shouldnotethat
formin
projectaid and programaid onlyexistin commitment
theOECD database.
9 One
is thatthe
thedisbursement
figures
usingthismethodology
advantagein estimating
sum of the estimatedisbursements
plus technicalassistancegrantsand food aid values,
obtainedformtheOECD-DAC database,exactlyequal netODA disbursements
valuesreportedin theDAC database.

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Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?

353

Hansenand Tarp (2001) by adoptingthe GeneralMethodof Moments


(GMM) estimation
procedure.This techniqueallowsus to purgetimeinvariant
and to controlfortheendogeneity
ofthe
countryspecificeffects
We assumeherethatall explanatory
variablesare
variables.10
explanatory
in
the
used
to construct
those
potentially
regression
endogenous,
including
elementof the Burnsideand
thepolicyvariable,whichis an important
variablesare
Dollar story.One shouldalso note thatall time-invariant
thedatais first
differenced.
The
purgedfrom(1) sinceunderourestimator
GMM approachadoptedhereis theGMM system,
developedbyBlundell
both
usesinternal
instruments
andBond(1998).TheGMM-SYStechnique
the
is
then
used
to
check
inlevelsand difference.
The Sargan/Hansen
J-test
demisecorrection
oftheinstruments.
Wealso usetheWindmeijeir
validity
for
small
bias
to
control
2000).
(Windmeijeir
option
sample
3 Results
it is crucialto
Beforediscussingtheresultson theestimatedcoefficients
first
test
concerns
the
our
tests.
The
validityof theinanalyze diagnostic
to
it
is
worth
that
the
GMM
struments;
approach dynamicpanels
recalling
It can be seenfromTable 1 throughto Table4
usesinternal
instruments.
thattheHansentestp-valueis greaterin all casesthanthe5 percentsigthatone cannotrejectthe null hypothesis
nificance
level,thusimplying
thatour instruments
arevalid.11The secondtestconcernsthequestionof
serialcorrelation.
The p-valuesoftheArellanoand Bond AR(2) statistics
in Tables1, 2, 3 and 4 are all abovethe 5 percentsignificance
leveland,
which
the
of
second-order
serial
absence
correlation,
therefore,
confirming
wouldrenderourresults
inconsistent.
10
Hansen and Tarp (2001) used the GMM estimatorsuggestedby Arellano
Actually,
and Bond (1991). We use here the GMM systemsestimatorsince it has been shown
to be perform
betterforsmallsamples;see Blundelland Bond (1998). The validityof
can be testedusing Arellanoand Bond's (1991) Sargantest.In all
theseinstruments
we foundsupportfor our instruments.
One should also note that this
specifications
The AR(2) test,as
estimator
crucially
dependson thelack secondorderautocorrelation.
proposedbyArellanoand Bond (1991),producedno evidenceof such.Bothof thesetests
are reported
in thetables.
11 It is
are foundto be valid
to notehoweverthatalthoughthe instruments
important
thereis an importantquestionin the empiricalliterature
regardingthe strengthof
the instruments.
To our knowledgeno such testhas been providedso far.Therefore,
like moststudiesadoptingthe GMM approachwe onlyfocuson the validityof these
instruments.

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Reviewof WorldEconomics2008,Vol. 144 (2)

354

and DollarSpecification
Table1: Burnside
(1)
Loginitialreal
GDP/capita
Assassination
Ethno-linguistic
x
fractionalisation
assassination
M2/GDP
Projectaid
Financialprogram
aid
Technical
assistance

Foodaid

Policy
Policyx project
aid
Policyx financial
aid
program
Policyx technical
assistance
Policyx foodaid
Constant

(2)

(3)

(4)

(5)

2.016
1.885
1.908
1.787
1.218
(1.75)* (2.87)*** (2.19)** (2.46)** (1.61)
-0.626
-0.580 -0.669
-0.672
-0.528
(1.29)
(1.34)
(1.30)
(1.46)
(0.98)
0.970
(1.10)
0.023
(0.95)
0.425
(4.10)***
-0.372
(1.68)*
-0.828
(1.99)*

0.169
(0.20)

0.643
0.881
0.837
1.002
(0.95)
(1.00)
(0.56)
(0.99)
0.021
0.023
0.017
0.030
(0.94)
(0.89)
(0.74)
(1.36)
0.366
0.388
0.429
0.406
(1.43) (4.02)*** (4.13)*** (3.89)***
-0.360
-2.087
-0.419 -0.401
(1.89)*
(1.64) (2.10)** (1.98)*
-0.751
-0.768
-1.560 -1.012
(1.58) (2.40)**
(1.91)* (1.72)*

0.117
(0.12)

0.125
(0.17)

0.124
(0.11)

-6.256
(1.58)

(6)
0.064
(0.04)
-0.963
(2.09)**
1.581
(1.65)
0.042
(1.69)*
0.322
(0.25)
-2.129
(1.05)
0.456
(0.12)

-3.148
(0.66)

0.635
0.617
0.705
0.739
1.043
0.628
(2.68)*** (2.17)** (2.87)*** (2.33)** (3.75)*** (1.89)*
-0.005
-0.003
(0.23)
(0.02)
-0.183
-0.178
(1.44)
(0.83)
-0.076
0.164
(0.81)
(0.41)
-0.656
-0.369
(1.72)*
(0.77)
-7.895
3.317
-4.893 -10.030 -4.841
7.617
(0.54)
(1.43)
(0.62)
(0.99)
(0.45)
(0.65)

Observations
Numberofcountries

414
69

414
69

414
69

414
69

414
69

414
69

^ow^T
forAR(2) (p-value)
Hansentest(p-value)

0-637

0.663

0.978

0.707

0.704

0.753

0.743

0.883

0.892

0.894

0.895

1.000

o.ooo o.ooo o.ooo o.ooo o.ooo o.ooo


^relaAnD^wndtf
forAR(1) (p-value)
at the10,5, and 1 perin parentheses;
Note:Robustt-statistics
*, **,***denotesignificance
centlevel,respectively.

Table1 presents
resultsusingthe
to ourestimated
coefficients,
Turning
Withrespectto ourpolicyindex
Burnsideand Dollar(2000) specification.
it is worthpointingout thatit is constructed
usinga similarapproachas
in Burnsideand Dollar (2000),althoughthederivation
ofourestimates
is

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Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?

355

done using the dynamicpanel technique (and not the OLS technique).12
Turningnow to our results,it can be seen fromcolumn (1) of Table 1
The impacts of
thatprojectaid affectsgrowthpositivelyand significantly.
financialprogramaid and technicalassistanceappear to be negativebut
only significantat the 10 percentlevel. Food aid does not appear to exert
any statistically
significanteffecton growth.The resultalso indicatesthat
the policy environmentof the recipientcountry(policy) exertsa positive
significanteffecton growth.In column (2) throughto column (5), we
interactour policyvariableeach time with one of the aid variables.None
of the interactionterms are found to be statisticallysignificant,except
the food aid-policy interactionterm which is negativeand significantat
the 10 percentlevel. Moreover,financialprogramaid appears, in general,
to exert a negativeeffecton growth.In column (6) we include all the
different
interactionterms.Again none of themis found to be statistically
significant.
Table 2 reportsthe resultsrelatedto the Hansen and Tarp (2001) specification.One should recall that the storyof the study by Hansen and
Tarp (2001) is thataid increasesgrowthon averagebut with diminishing
returns.In column (1) throughto column (4) we thus enteredeach aid
categoryin nonlinearform.What emergesfromthese regressionsis that,
as withthe previous specification,the effectof project aid is positiveand
The impactof financialprogramaid is negativebut
statistically
significant.
in
one
only significant
regression.As faras diminishingreturnsare concernedresultsin column (1) suggestthatprojectaid increasesgrowthwith
diminishingreturns.In column (2) wherefinancialprogramaid is entered
in nonlinearform,we findno evidence of diminishingreturns,which is
consistentwith the factfinancialprogramaid affectsgrowthnegatively.13
Resultsin column (3) indicatethatalthoughtechnicalassistancedoes not
exertanysignificant
effecton growth,highlevelsof it can be detrimentalto
therecipienteconomy.Resultsin column (4) suggestthatfood aid does not
lead to diminishingreturns.In the finalcolumn of Table 2 we enterall the
aid categoriesin nonlinearform.Againtheonlytypeof aid associatedwith
diminishingreturnsis projectaid.
12 The

28.35,-2.89 and 0.182 forbudpolicyvariablewas computedwiththecoefficient


and openness,respectively.
getsurplus,inflation,
13 The
returnsrequiresthataid firstincreasesgrowthand after
conceptof diminishing
a certainthreshold
levelthiseffect
becomenegative.
However,in thepresentcase we find
ifone findsdiminishing
thatfinancial
and therefore
programaid affects
growthnegatively
returns
therewouldbe someinconsistency.

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ReviewofWorldEconomics2008,Vol. 144 (2)

356

Table2: HansenandTarpSpecification
(1)

(2)

(3)

(4)

(5)

-0.088
(0.87)
-4.816
(1.80)*
-3.273
(1.11)
1.667
(2.66)***
-0.400
(1.12)
0.925
(1.46)
0.659
(2.15)**
-0.552
(2.37)**
0.282
(0.54)

-0.028
(0.36)
-5.558
(2.24)**
-3.233
(1.48)
2.595
(3.89)***
-0.477
(1.43)
1.150
(1.72)*
0.062
(0.31)
-0.217
(0.30)
0.221
(0.40)

-0.100
(1.14)
-3.701
(1.56)
-4.503
(2.05)**
1.168
(1.61)
-0.580
(1.74)*
1.230
(1.68)*
0.299
(2.84)***
-0.419
(1.58)
0.310
(0.21)

0.004
(0.04)
-0.389
(0.10)
4.287
(1.43)
2.340
(3.61)***
-0.513
(1.17)
0.841
(1.15)
0.074
(0.12)
-0.514
(1.33)
-0.062
(0.05)

-0.119
(1.56)
-6.405
(2.13)**
-3.908
(1.25)
1.073
(1.54)
-0.540
(1.43)
1.021
(1.48)
1.033
(4.43)***
-1.627
(2.77)***
-1.298
(1.08)

(Financialprogramaid)2

-0.022
(3.63)***
-0.361
(1.54)
0.010
(1.84)*
-

(Financialprogramaid)

(Financialprogramaid)2

(Technicalassistance)2

-0.000
(0.00)
0.155
(0.36)
-0.038
(0.82)
-

(Technicalassistance)

A (Technicalassistance)2

(Food aid)2

A(Foodaid)

A(Food aid)2

Averageannual per capitagrowthlagged


Log initialrealGDP/capita
Log(l+inflation)
Sachs-Warner
Assassination
Ethno-linguistic
x assassination
fractionalisation
Projectaid
Financialprogramaid
Technicalassistance

Foodaid

0.040
(0.09)

(Projectaid)2
(Projectaid)
A(Projectaid)2

Observations
Numberof countries

AT

Hansen test(p-value)

0.379
(0.68)

1.045
(1.14)

2.257
(1.42)

0.377
(0.30)

0.064
(0.15)
-1.374
(0.57)
-0.085
(0.16)

-0.029
(5.72)***
-0.226
(1.22)
0.009
(2.40)**
0.122
(1.89)*
0.363
(0.75)
-0.025
(0.47)
0.072
(0.74)
-0.288
(0.39)
0.026
(0.45)
0.012
(0.06)
-2.172
(1.53)
0.151
(0.90)

-0.026
(0.18)
-3.394
(2.66)***
0.192
(2.10)**

350
75

350
75

350
75

350
75

350
75

0.236

0.172

0.543

0.419

0.945

0022 05 001 00180043


0059-2230179-359-310

in parentheses;*, **,***denotesignificanceat the 10, 5, and 1 percent


Note:Robustt-statistics
level,respectively.

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Ouattara/Strobl:Aid, Policy and Growth:Does Aid Modality Matter?

357

we turnour attention
to theDaalgardetal. (2004) specificaFinally,
in Table3. Lookingthroughcolumn(1) to
tion.Resultsare summarized
thatprojectaid affects
column(5) it can be seenthatthefinding
growth
and significantly
is confirmed.
The impactappearsto be even
positively
effect
inthisspecification.
Theevidencealsopointstothenegative
stronger
this
is
on
offinancial
aid
However,
negativeimpact only
growth.
program
aid (technicalassisat the 10 percentlevel.Againnonfinancial
significant
tance,and foodaid) does notappearto affect
growth.We nextcheckthe
outsidethetropics.In
ofwhether
aid worksbetterin countries
hypothesis
aid
with
the
column(1) ofTable3 we interact
tropicalareafraction
project
areathatis inthetropics).
variable(whichmeasurestheshareofa country's
and statically
The coefficient
oftheinteraction
termis negative
significant.
In columns(2)-(4), we repeatthesameexerciseforfinancial
programaid,
The resultsshowthecoeftechnical
and foodaid,respectively.
assistance,
forfinancial
ficients
termto be negativeand significant
oftheinteraction
whilstthatoffoodaid is onlysignifiassistance
programaid and technical
in column(5) wherewe includeall
cantat the 10 percentlevel.However,
theinteraction
termsonlytheprojectaid x tropicalis statistically
significant,albeitat the10 percentlevel.In termsoftotalimpactofthedifferent
in thetropicsitcan be seenthatourresultsare
ofaid on growth
categories
withthefindings
consistent
ofDaalgardetal. (2004),i.e.,theimpactofaid
in thetropicsis notstatistically
on growth
significant.
effecton growth
The findingthataid does not bear any significant
it
in thetropicscould be attributed
to manyfactors.More importantly,
couldbe thatthesecountries
needmoreaid giventheirspecificcharacteristics.As an additionalexercisewe attemptto investigate
thispossibility
in
time
similar
as
Table
3
but
this
by re-running
regressions
interacting
thetropicalvariablewiththesquareoftheaid categories
(whichwe use as
a proxyforhighlevelsofaid). The resultsaresummarized
in Table4. As it
canbe seen,theeffect
remainsstrongthroughout
ofprojectaid on growth
columns( 1)-(5). Although
oftheinteraction
term
theestimated
coefficient
withprojectaid remainsnegative
ithasfallenin magnitude.
andsignificant
The totalimpactof projectaid on growthin thetropicsis now positive
and statistically
Thiscouldimplythatdonorsmightneedto
significant.14
increaseaid levelsforcountries
inthetropicsgiventheirspecific
characteristicsin orderto increaseitseffectiveness.
14 We also
experimentedwith aid (components)3, 2 timesaid (components) and 3 times
aid as proxies forhigh aid levels with similar results.

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ReviewofWorldEconomics2008,Vol. 144 (2)

358

Table3: Dalgaard,
HansenandTarpSpecification
Log initialrealGDP/capita
Budgetsurplus
Log(l+inflation)
Sachs-Warner
Projectaid
Financialprogramaid
Technicalassistance
Food aid
Projectaid x tropical
Financialprogramaid x
tropical
Technicalassistancex
tropical
Food aid x tropical
Constant
Totalimpactof projectaid in thetropics
Totalimpactof financialprogramaid
in thetropics
Totalimpactof technicalassistancein
thetropics
Totalimpactof foodaid in thetropics
Observations
Numberof countries
Arrelano-Bond
testforAR(1) (p-value)
Arrelano-Bond
testforAR(2) (p-value)
Hansentest(p-value)

(1)

(2)

(3)

(4)

(5)

0.218
(0.09)
17.126
(2.28)**
-0.572
(0.26)
2.325
(4.14)***
0.560
(4.97)***
-0.327
(1.82)*
0.157
(0.45)
0.375
(0.50)
-0.594
(2.41)**
-

0.630
(0.20)
13.008
(1.60)
-0.211
(0.08)
2.357
(4.32)***
0.318
(2.72)***
0.288
(0.76)
-0.366
(0.94)
-0.379
(0.57)
-

0.794
(0.27)
11.822
(1.23)
-0.056
(0.02)
2.204
(3.34)***
0.341
(2.19)**
-0.374
(1.69)*
2.323
(1.67)*
-0.397
(0.57)

1.982
(1.11)
18.696
(1.86)*
1.081
(0.60)
2.280
(4.14)***
0.363
(3.15)***
-0.423
(2.28)**
-0.428
(1.32)
4.604
(1.85)*

0.542
(0.34)
23.687
(2.14)**
-0.242
(0.14)
2.069
(3.09)***
0.573
(5.01)***
0.091
(0.30)
1.207
(0.61)
-0.343
(0.09)
-0.463
(1.80)*
-0.351
(1.01)
-1.465
(0.67)
0.904
(0.21)

-0.950
(2.48)**
-

3.651
(0.14)
-0.034
(0.18)
-

-2.888
(2.07)**

-5.185
(1.91)*

-0.950
(0.03)
-

-3.095
(0.09)
-

-16.400
(0.77)
-

-0.662
(2.27)**
-

-0.665
(1.25)

425
71
0.022
0.059
0.236

425
71
0.05
0.223
0.172

-0.580
(0.80)

0.265
(0.01)
0.110
(0.46)
-0.260
(0.99)
-0.258
(0.55)
0.561
(0.69)

425
71
0.018
0.359
0.419

425
71
0.043
0.310
0.945

425
71
0.001
0.179
0.543

Note: Robust t-statisticsin parentheses;*, **, *** denote significanceat the 10, 5, and 1 percentlevel,respectively.

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Ouattara/Strobl:Aid, Policy and Growth:Does Aid Modality Matter?

359

Table 4: Dalgaard, Hansen and TarpSpecification


withaid TermsSquared

Log initialrealGDP/capita
Budgetsurplus
Log(l+inflation)
Sachs-Warner
Projectaid
Financialprogramaid
Technicalassistance
Food aid
Projectaid2x tropical
Financialprogramaid2x
tropical
x
Technicalassistance2
tropical
Food aid2x tropical

(1)

(2)

(3)

(4)

(5)

3.486
(1.51)
24.713
(1.95)*
1.628
(0.65)
2.446
(3.69)***
0.558
(5.79)***
0.024
(0.15)
0.152
(0.38)
0.707
(1.08)
-0.025
(2.91)***
-

2.814
(1.54)
22.225
(1.87)*
1.660
(0.82)
2.440
(3.78)***
0.346
(2.91)***
-0.019
(0.06)
-0.496
(1.60)
0.139
(0.22)
-

4.416
(1.79)*
17.284
(1.53)
2.802
(1.14)
2.835
(3.72)***
0.342
(2.55)**
-0.102
(0.46)
0.356
(0.52)
-0.254
(0.35)

2.027
(1.19)
20.762
(1.91)*
0.979
(0.51)
2.435
(3.69)***
0.325
(2.38)**
-0.090
(0.44)
-0.322
(1.09)
-2.172
(1.32)

2.231
(0.92)
25.910
(1.96)*
0.486
(0.21)
2.481
(3.50)***
0.538
(4.50)***
0.209
(0.68)
0.105
(0.16)
-1.485
(0.75)
-0.027
(2.59)**
-0.001
(0.02)
0.028
(0.52)
0.559
(1.46)
-16.157
(0.56)

-0.037
(0.93)

-24.925
(1.11)

Constant

-30.922
(1.09)

Totalimpactofprojectaid in thetropics

0.532
(5.68)***
-0.055
(0.19)
-

Totalimpactof financial
programaid
in thetropics
Totalimpactof technicalassistancein
thetropics
Totalimpactof foodaid in thetropics

-0.072
(1.44)

-42.885
(1.46)

0.495
(1.47)
-15.790
(0.75)

0.283
(0.44)

-1.677
(1.25)

0.511
(4.47)***
0.208
(0.74)
0.133
(0.22)
-0.925
(0.56)

425
425
425
425
425
71
71
71
71
71
0.000
0.000
0.000
0.000
0.000
0.907
0.427
0.328
0.689
0.758
0.299
0.281
0.286
0.345
0.268
in parentheses;*, **, *** denote significanceat the 10, 5, and 1 perNoe:Robust t-statistics
centlevel,respectively.
Observations
Numberof countries
Arrelano-Bond
testforAR(1) (p-value)
Arrelano-Bond
testforAR(2) (p-value)
Hansentest(p-value)

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360

ReviewofWorldEconomics2008,Vol. 144 (2)

4 ConcludingRemarks
to therecentempiricalliterature
This paperhas attempted
to contribute
aid byinvestigating
on theeffectiveness
ofdevelopment
howdifferent
aid
modalities
affect
Forthispurpose,wetestedthethreemaincompetgrowth.
literature
(i.e.,theBurnsideand Dollar
ingtheoriesin theaid effectiveness
and
Hansen
and
(2000),
Tarp(2001),
Daalgardetal. (2004) specifications),
fora sampleof
usingtheGMM-SYSapproachto dynamicpanelestimator
aid recipient
overtheperiod1974-2001.
countries
exertsa positive
Our resultsappearto suggestthatprojectaid financing
whilst
financial
on
the
of
impact
impact growth,
programaid
significant
is negative.
Theseresultsarerobustacrossall thethreespecifications
used.
As faras thenonfinancial
formof aid is concerned,
we foundno strong
and foodaid contribute
to growth.
evidencethattechnical
assistance
we
find
that
affects
and
positively significantly,
policy
growth
Although
thattheworking
therewas no evidenceto supportthehypothesis
ofaid is
a
We
also
found
evidence
of
nonlinear
on
relationship
contingent policy.
inwhichthepositiveandsignificant
betweenprojectaidandgrowth
impact
returns.
Thishasgenerally
ofprojectaid on growth
issubjecttodiminishing
intheaidliterature
as a problemofabsorptive
beeninterpreted
i.e.,
capacity,
theinability
oftherecipient
economyto absorbverylargeamountofaid.
levelfoundbymoststudies
wearguethat,giventhatthethreshold
However,
theargument
of
is wellabovetheamountaid receivedbymostcountries,
absorptivecapacityis not a plausibleone. A morelikelyexplanationin
thelargerthenumberofprojects
our caseis theproblemofcoordination:
themorecoordination
becomesan issueforbothdonorsandthe
involved,
thata veryhighamountoftechnical
Our evidencealso suggests
recipient.
assistance
can be detrimental
to therecipient
economy.Financialprogram
withgrowth.
aid and foodaid do notexhibitanynonlinearrelationship
As
faras theDaalgardetal. (2004) "story"is concerned,
i.e.,aid worksonlyin
countries
outsidethetropics,our resultsappearto supporttheirfindings.
ofthedifferent
ofaid in
Indeed,we foundthatthetotaleffects
categories
different
fromzero.
thetropicsarenotstatistically
thatprojectaidstimulates
ourresults
appeartosuggest
growth
Although
that
morethantheothertypesofaid oneshouldnotjumptotheconclusion
instrument
adopted
project-based
financing
lendingshouldbe theexclusive
are
based
on
as
these
donors,
only cross-country
by
analysis.To
findings
in
of
new
aid
it
is
avoidrepeating
mistakes
the
policies important
past
design
researchcommunity
to substantiate
the recent
forthe aid effectiveness

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Ouattara/Strobl:
Aid,Policyand Growth:Does Aid ModalityMatter?

361

in thecontextof country-specific
studies.This taskhas become
findings
criticalgiventheemphasison usingaid to achievetheMDGs bytheyear
2015.
A limitation
of thispaper is thatit relieson veryrestrictive
growth
modelsto capturethe impactof aid flows.The modelsfailto takeinto
accounttheimportant
issueofaidvolatility.
Indeed,studiesbyLensinkand
and
and
Hamann
Bul
(2001,2003,2005) findthataid
(2000)
Morrissey
In relation
country.
volatility
prospectoftherecipient
damagesthegrowth
to theaid disaggregation
issue,Fieldingand Mavrotas(2005) findproject
Anotherimportant
aid and programaid flowsto be subjectto volatility.
models
is
the
issue
of "Dutchdisease"
factoroverlooked
these
by
growth
on
whichhavebeenassociatedwithaid flows.Futureresearch
typeeffects,
theaid-growth
nexusshouldseekto addressthesedeficiencies.
Appendix
Table Al: Data Set Construction
Notes3

Variable

Data source

Per-capitaGDP growth
InitialGDP per capita

WorldBank (2003)
Summersand Heston (1991)
updatedusingGDPG

Naturallogarithmof GDP/capitaforfirstyear
of period;constant1985 dollars

Ethno-linguistic
1960
fractionalization,

Roeder(2001)

thattwo individualswill belong


Probability
to different
ethnicgroups

Banks (2002)

Assassinations/capita

Assassinations/
capita
M2/GDP,laggedone
period

WorldBank (2003)

Budgetsurplus

WorldBank (2003),
IMF (2003)

Inflation

WorldBank (2003),
IMF (2003)

Sachs-Warner,updated

Sachs and Warner(1995),


Easterlyetal. (2004),
Wacziargand Welch(2002)
DAC (2002),
WorldBank (2003)

Net OverseasDevelopmentAssisGDP
tance/nominal
Net projectaid/
nominalGDP
Net financialprogram
aid/nominal
GDP

WorldBank primarydata source.Additional


values extrapolatedfromIMF, usingseries
80 and 99b (local-currency
budgetsurplus
and GDP)
Naturallogarithmof 1 + inflationrate.World
Bank primarydata source.Wholesaleprice
inflationfromIMF used whereconsumer
pricedata unavailable
Extendedto 1998. Slightlyrevisedpre-1993.
Full descriptionwill be publishedseparately

Ouattara(2005),
WorldBank (2003)
Ouattara(2005),
WorldBank (2003)

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ReviewofWorldEconomics2008,Vol. 144 (2)

362

Table Al: continued


Variable

Data source

Technicalassistance
grants/nominalGDP
Food aid/nominalGDP

DAC (2006),
WorldBank (2003)

Tropicalarea fraction

Gallup and Sachs (1999)

Notesa

DAC (2006)

a All variables
averages.
aggregatedovertimeusingarithmetic

Source:AdaptedfromRoodman(2004).

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