Aid Volatility Research Articles

A conductive effect of aid volatility on health poverty in aid-recipient countries

A conductive effect of aid volatility on health poverty in aid-recipient countries

Energy aid volatility across developing countries: a disaggregated sectoral analysis

Energy aid volatility across developing countries: a disaggregated sectoral analysis

Some factors of energy aid volatility across developing countries: A special focus on renewable sector

Energy aid effectiveness is paramount for the timely achievement of Sustainable Development Goals (SDG)-7. However, the volatility of energy aid reduces its effectiveness. Given this, the paper empirically investigates the determinants of energy aid volatility and its renewable energy generation (REG) component for 76 aid-recipient countries during 2002–2019. By considering recipient and donor-specific factors, we also explore the linkages of all these factors with the direction of volatility, i.e., aid shortfalls and windfalls. Findings reveal that variations in energy/REG aid volatility reflect the recipient's macroeconomic and institutional characteristics more than donor-specific factors. Moreover, the impacts of all these factors vary across aid shortfalls and windfalls. Specifically, economic prosperity and aid dependency increase energy/REG aid volatility, infused by different directions of aid shocks. Contrarily, oil rents, political stability, and strong democracy reduce aid volatility. Multilateral donors provide more stable funding compared to bilateral donors. We also observe that donors provide stable REG aid in countries with inadequate renewable policies and clean development mechanism funding, playing a catalyst role in supporting institutionally weak countries in the renewable sector. We draw certain policy implications for donors and recipients to manage and mitigate the adverse consequences of volatile energy aid flows.

Aid instability, aid effectiveness and economic growth

AbstractMotivationDespite large flows of official development assistance, the performance of recipient economies has been discouraging. Aid effectiveness, including the effect of instability of aid flows, has thus become a central concern.PurposeThis article assesses the effect of unstable aid flows on aid effectiveness and economic growth.Approach and MethodsWe divide the aid effect into two stages: without‐aid and with‐aid. The impact of aid volatility is determined by the direction of volatility, the paths of aid and the incidence of its impact on the economy. The generalized method of moments (GMM) is applied to the panel data of 78 aid recipients from 2003 to 2017.FindingsAn open economy magnifies the impact of aid fluctuations (both positive and negative) for recipients highly dependent on aid. No statistically significant influence of aid volatility on growth can be seen. Volatility may however matter, since positive and negative impacts may offset each other. Aid unpredictability weakens aid efficiency and thus cripples growth.Policy ImplicationsDonor agencies should make their assistance more predictable, above all in countries that depend heavily on aid.

Foreign aid volatility and economic growth in Sub-Saharan Africa: Does institutional quality matter?

This paper investigates whether foreign aid volatility affects economic growth in countries with an effective institution. Specifically, we examine the role of institutional quality in aid volatility-growth nexus using data from 45 Sub-Saharan African countries over the period 1980–2017. We account for different aid types, namely, aid commitment and aid disbursement. Our results show that, unlike foreign aid disbursement, foreign aid commitment is growth-enhancing, but aid volatility adversely impacts on economic growth. We find that although institutional quality and its sub-dimensions enhances economic growth, it fails to curtail the adverse effect of aid volatility on economic growth. With regard to aid flows, aid benefits a country only if the donor commits to provide the aid to the recipient country. Exploiting aid flows’ policy implication, the paper further uncovers that promoting an effective institution could enhance aid effectiveness in Sub-Saharan Africa.

Aid fragmentation and volatility in the Pacific.

In this article we comprehensively document aid volatility (short‐term changes in aid flows) and aid fragmentation in the Pacific. We study two types of fragmentation: fragmentation across countries and fragmentation across projects. Our research draws on a new dataset compiled by the Lowy Institute. The dataset includes aid flows to the Pacific from non‐traditional donors such as China. This allows us to undertake the first‐ever study of Pacific aid volatility and fragmentation factoring in non‐traditional donors. We contrast the Pacific with other regions, finding that while fragmentation across donors is less in the Pacific, project fragmentation is worse, as is aid volatility. We find fragmentation across donors is increasing in the Pacific. We find a similar trend for fragmentation across projects. We find no evidence that non‐traditional donors such as China are driving these trends. However, we find some evidence that non‐traditional donors give more volatile aid.

Effect of volatility of development aid on volatility of foreign direct investment inflows

PurposeThis paper aims to examine the effect of development aid volatility on foreign direct investment (FDI) volatility in aid recipient countries.Design/methodology/approachThe empirical analysis has relied on a sample of 117 countries over the period 1981–2016 and used the two-step system generalized methods of moments (GMM) approach.FindingsThe findings indicate that development aid volatility exerts a positive and significant effect on FDI volatility, with the magnitude of this positive effect rising as countries’ real per capita income increases. Furthermore, development aid volatility is non-linearly related to FDI volatility, as additional rises in the degree of development aid volatility further amplify FDI volatility.Research limitations/implicationsThese outcomes highlight that volatility of development aid inflows enhances the volatility of FDI inflows. Thus, the enhancement of the aid coordination system between donor-countries and recipient-countries would not only help mitigate the volatility of aid – which reduces the macroeconomic effectiveness of aid – but also stabilizes FDI inflows to developing countries.Practical implicationsA limitation of the present paper is its reliance on aggregate FDI inflows to perform the analysis. Availability of data on greenfield FDI inflows and cross-border mergers and acquisitions FDI inflows over a long-time-period would provide an opportunity to conduct an in-depth analysis of the volatility of development aid on FDI inflows volatility. Furthermore, it could be interesting to investigate in the future (if data is available) the extent to which aid coordination systems between donor-countries and recipient-countries versus recipient-countries’ domestic factors contribute to explaining the dynamics of FDI inflows volatility in recipient-countries of these two types of capital flows.Originality/valueTo the best of the authors’ knowledge, this topic has not been addressed in the literature.

Does foreign aid volatility increase international migration?

Scholars have long debated the relationship between foreign aid and international migration, with some arguing that foreign aid can deter emigrants and others contending that aid enables them. We contribute to this discussion by exploring whether negative aid shocks affect migration patterns. We theorize that these shocks, which occur when there are large and abrupt decreases in aid disbursement to a given country, lead individuals in aid-recipient countries to emigrate. Such shocks lead to reductions in the provision of public and community services that are funded by aid. These reductions in turn force individuals who depend on these services to seek better lives abroad. We expect this effect to be especially evident among low-skilled individuals, who are most reliant on the services that are supported by foreign aid. We use country-level panel data to test hypotheses derived from these arguments and we find, first, that negative aid shocks are accompanied by heightened emigration rates and, second, that this effect is driven by the emigration of relatively unskilled individuals.

Aid Volatility, Human Capital, and Growth

We study the effect of aid volatility on education outcomes and economic growth, in a model that focuses on a low-income economy where acquiring skills benefits from public subsidies partly finance...

Responding to aid volatility: government spending on district health care in Zambia 2006–2017

ABSTRACT Background: A corruption event in 2009 led to changes in how donors supported the Zambian health system. Donor funding was withdrawn from the district basket mechanism, originally designed to pool donor and government financing for primary care. The withdrawal of these funds from the pooled financing mechanism raised questions from Government and donors regarding the impact on primary care financing during this period of aid volatility. Objectives: To examine the budgets and actual expenditure allocated from central Government to the district level, for health, in Zambia from 2006 to 2017 and determine trends in funding for primary care. Methods: Financial data were extracted from Government documents and adjusted for inflation. Budget and expenditure for the district level over the period 2006 to 2017 were disaggregated by programmatic area for analysis. Results: Despite the withdrawal of donor funding from the district basket after 2009, funding for primary care allocated to the district level more than doubled from 2006 to 2017. However, human resources accounted for this increase. The operational grant, on the other hand, declined. Conclusion: The increase in the budget allocated to primary care could be an example of ‘reverse fungibility’, whereby Government accounted for the gap left by donors. However, the decline in the operational grant demonstrates that this period of aid volatility continued to have an impact on how primary care was planned and financed, with less flexible budget lines most affected during this period. Going forward, Government and donors must consider how funding is allocated to ensure that primary care is resilient to aid volatility; and that the principles of aid effectiveness are prioritised to continue to provide primary health care and progress towards achieving health for all.

Foreign aid volatility and lifelong learning

This paper has put a demand-side empirical structure to the hypothesis that foreign aid volatility adversely affects choices to lifelong learning in recipient countries. Lifelong learning is measured as the combined knowledge acquired during primary, secondary and tertiary educational enrolments. Three types of aggregate foreign aid volatilities are computed in a twofold manner: baseline standard deviations and standard errors (standard deviations of residuals after first-order autoregressive processes). An endogeneity robust system GMM empirical strategy is employed. The findings broadly show that foreign aid volatility does not adversely affect the demand-side choices of lifelong learning in Africa. As a policy implication, when faced with aid uncertainty, the demand for education would increase. This may be explained by the need for more self-reliance in order to mitigate income risks or/and the use of education as means of coping with uncertainty. More policy implications are discussed.

Foreign aid volatility and lifelong learning

This paper has put a demand-side empirical structure to the hypothesis that foreign aid volatility adversely affects choices to lifelong learning in recipient countries. Lifelong learning is measured as the combined knowledge acquired during primary, secondary and tertiary educational enrolments. Three types of aggregate foreign aid volatilities are computed in a twofold manner: baseline standard deviations and standard errors (standard deviations of residuals after first-order autoregressive processes). An endogeneity robust system GMM empirical strategy is employed. The findings broadly show that foreign aid volatility does not adversely affect the demand-side choices of lifelong learning in Africa. As a policy implication, when faced with aid uncertainty, the demand for education would increase. This may be explained by the need for more self-reliance in order to mitigate income risks or/and the use of education as means of coping with uncertainty. More policy implications are discussed.

Foreign Aid Volatility and Lifelong Learning

This paper has put a demand-side empirical structure to the hypothesis that foreign aid volatility adversely affects choices to lifelong learning in recipient countries. Lifelong learning is measured as the combined knowledge acquired during primary, secondary and tertiary educational enrolments. Three types of aggregate foreign aid volatilities are computed in a twofold manner: baseline standard deviations and standard errors (standard deviations of residuals after first-order autoregressive processes). An endogeneity robust system GMM empirical strategy is employed. The findings broadly show that foreign aid volatility does not adversely affect the demand-side choices of lifelong learning in Africa. As a policy implication, when faced with aid uncertainty, the demand for education would increase. This may be explained by the need for more self-reliance in order to mitigate income risks or/and the use of education as means of coping with uncertainty. More policy implications are discussed.

Foreign Aid and Development: The Civil Conflict Channel Reexamined

ABSTRACTLiterature on civil conflict effect of foreign aid provides contradictory findings. Some studies find a conflict-reducing effect of aid while for others aid sparks violent conflicts. Another strand of the literature reports the lack of any systematic and robust link between aid and conflict. The aim of this paper is to look beyond this debate on the effect of the volume of aid by investigating whether the volatility of aid could have any independent explanatory power in this empirical literature. Using a logit model of conflict onset on a panel of 130 developing countries from 1974 to 2005, I find that aid per se could have negative, positive or no-effect on conflict outbreak while the volatility of aid positively affects the risk of conflict. This latter result has proven to be robust to some extensions of the econometric model. Therefore, the volatility of aid is an important variable in the determination of aid’s impact on the risk of civil conflict. Consequently, analyses of development effects of aid must consider not only aid per se but also the dynamic behavior of this variable; particularly its volatility.

Tax Reform and Public Revenue Instability in Developing Countries: Does the Volatility of Development Aid Matter?

AbstractThis paper examines the relationship between tax transition reform, development aid volatility, and public revenue instability in developing countries. Empirical findings show that tax reform exerts a negative effect on tax revenue instability, and the magnitude of this negative effect diminishes as the degree of development aid volatility increases. Specifically, beyond a certain level of development aid volatility, tax reform enhances tax revenue instability. Overall, these findings suggest that higher development aid flows to developing countries should be accompanied by a lower aid volatility so as to ensure that tax reform would generate lower tax revenue instability in recipient countries. © 2019 John Wiley & Sons, Ltd.

AID VOLATILITY, MACROECONOMIC POLICY AND ECONOMIC GROWTH IN PAKISTAN

Like other developing countries, Pakistan also suffers from low saving base. Historically, foreign aid has played a crucial role in filling the gap between saving and investment in case of Pakistan, albeit with considerable volatility. We analyze the impact of foreign aid and its volatility in on economic growth in Pakistan over the period of 1974-2015; foreign aid effectiveness has been evaluated in the presence of sound macroeconomic policies by constructing an index of macroeconomic policy using principal component method. The study concluded that foreign aid and its volatility has negative impact on economic growth in Pakistan under currently prevailing macroeconomic policies. This study departs from existing studies in two ways. First, Generalized Method of Moments (GMM) approach has been used in this study to control for potential endogenity related to aid inflow. Secondly, aid volatility, measured through Hodrick–Prescott (HP) filter, has been incorporated in aid-growth nexus to gauge its impact of growth performance of the country

Follow the leader! The peer effect in aid supply decisions

AbstractThis study assesses the existence of imitative behaviour among donors in terms of their aid supply. The urgency in addressing this subject is motivated by an increasing degree of aid volatility and unpredictability which may be linked to this imitative behaviour.Our results highlight that while any connection among donor peers is a potential channel for the transmission of aid volatility, the extent of such volatility decreases significantly in the presence of established imitative behaviour.This result suggests that the promotion of donor imitative behaviour would contribute to containing the current and growing trend of volatility in aid supply.

An empirical exploration of relationships between official development assistance (ODA) and advances in water and sanitation subsectors

This paper explores aid effectiveness by studying the effect of aid, aid volatility, and key development indicators, focusing on safe access to water and sanitation (W&S) in both urban and rural ar...

Aid, Aid Volatility and Sectoral Growth in Sub-Saharan Africa: Does Finance Matter?

ABSTRACTThis article examines the impact of aid and its volatility on sectoral growth by relying on panel dataset of 37 sub-Saharan African (SSA) countries for the period 1983–2014. Findings from the system-generalized methods of moments show that, while foreign aid significantly drives sectoral growth, aid volatility deteriorates sectoral value additions impacting heavily on non-tradable sectors with no apparent effect on the agricultural sector. The deleterious effect of aid volatility on sectoral value additions in SSA is weakened by a well-developed financial system with significant impact on the tradable sector. Evidently, development of domestic financial markets enhances aid effectiveness.

Aid Volatility and Real Business Cycles in a Developing Open Economy

This article analyzes the impact of the unpredictability of foreign aid on macroeconomic fluctuations in the recipient country. I build a small open‐economy business cycle model that accounts for foreign aid shocks, with no preference shocks. The model is calibrated to reflect the structural empirical regularities of Cote d'Ivoire, a typical aid‐dependent developing country. The parameters of the exogenous shocks are estimated using Bayesian methods and time series data for Cote d'Ivoire. The model produces business cycle patterns that are consistent with the data and key stylized facts. Specifically, the excess volatility of consumption with respect to output is successfully replicated. The results suggest that the unpredictability of foreign aid contributes to explain the volatility of business cycles in the recipient economy and has negative welfare effects.