Aid and Public Finance: A Missing Link?

By Gstoettner, Markus; Jensen, Anders | Atlantic Economic Journal, June 2010 | Go to article overview

Aid and Public Finance: A Missing Link?


Gstoettner, Markus, Jensen, Anders, Atlantic Economic Journal


Introduction

Findings in recent publications generally agree that foreign aid does not have the desired positive effect on growth and poverty alleviation. The two main reasons for this seem to be political patterns of aid-flows and poor performance of recipient countries' public institutions (Alesina and Dollar 2000).

We investigate the relationship between the Quality of Public Financial Institutions (PFI quality) of less developed countries, and the level of multilateral aid they receive. This raises two central sets of questions:

First, does PFI quality develop in reaction to multilateral aid received? If such a relationship exists, will it be positive or negative; i.e., does multilateral aid foster or hinder public finance quality and thereby good governance and institutional development?

Second, do multilateral aid-flows move relative to the recipient country's PFI quality? If so, does empirical evidence suggest that multilateral donors regard improvements in PFI quality as an incentive (or condition) to increase aid-giving? Or could there be the case that recipient countries with poor institutions attract more aid?

This paper uses empirical evidence, in the form of panel data on 86 countries over a 19 year period, to answer the questions above. Apart from a set of robust econometric specifications, our research also requires the construction of a coherent measure of PFI quality. For this purpose we set up a new Public Financial Institution Quality (PFIQ) Index, which draws from standardised assessments of institutional quality, as well as from reliably available national data.

We restrict our investigation to multilateral aid-giving, as its underlying decisions should be free from political and strategic motives (Alesina and Dollar 2000). Multilateral aid is defined as foreign aid donations from the following: African Development Bank, African Development Fund, Asian Development Bank, Asian Development Fund, European Commission, International Bank for Reconstruction and Development, International Development Association, InterAmerican Development Bank, Inter-American Development Bank Special Fund, International Fund for Agricultural Development, United Nations Development Program, United Nation's Children's Fund, Joint United Nations Programme on HIV/AIDS, United Nations Population Fund, and the Global Fund.

Literature Review

The bulk of existing literature on foreign aid is divided into two sections. One section studies the effects of foreign aid on the recipient country's institutions and governance, and the other studies the impact of changes in institutions and governance on aid-flow patterns.

Concerning the effects of foreign aid on recipient country's institutions, Boone (1996) argues that aid does not cause an increase in investment or improve human development indicators, but it does increase the size of government. Similarly, Burnside and Dollar (2000) estimate an equation for government consumption as a share of GDP, and find that aid has a strong positive impact on government consumption. Both studies suggest that aid does have an effect on governmental institutions, but that these changes, in turn, seem not to positively translate into growth and poverty alleviation. This puzzle suggests that the black box of governance in developing countries is not working effectively. This may be due to misguided incentives and rent-seeking behavior or to chronic institutional inabilities--both of which are related to PFI quality.

In their 2000 paper, Alesina and Dollar find that exogenous changes in aid have no impact on recipient countries' levels of democratization. On the same note, Burnside and Dollar (2000) argue that aid has no substantial effect on economic policies. Assuming that institutional variables such as democratization and economic policies are closely intertwined with PFI quality (because of positive externalities or spill-over effects), these findings suggest that aid may not have any significant impact on PFI quality. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Aid and Public Finance: A Missing Link?
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.