Foreign Aid Flows Research Articles

The Dynamics of Foreign Aid Trends and Patterns Among Low- Income Countries in Africa

Abstract Research background: Foreign aid flows to Africa mostly the Low-Income Countries (LICs) have increased drastically since 2000. Increasing aid flows are expected to stimulate economic growth that can release resources towards enabling LICs to reduce aid dependency. Purpose: The purpose of this study is to discuss the dynamics of bilateral aid trends and patterns among 27 LICs in Africa during 2000–2017. The main question this study tries to answer is: how have aid sources, compositions and dependency changed in LICs? Research methodology: The study employs a descriptive analysis technique to analyses bilateral aid flows to LICs in Africa from 50 donors during 2000–2017. Results: Total net aid flows to LICs increased by 1.5 times during 2000–2017 and were predominantly in the form of grants (92.7%). The study found a shift of sectoral aid allocations from the economic and productive sectors towards the social sector. Net aid as a share of GDP increased almost two-fold; implying an increasing trend of aid dependency in several LICs. Novelty: This study tries to present a full account of bilateral aid flows both from Traditional Donors (TDs) and Non-Traditional Donors (NTDs), unlike many earlier studies that have focused on TDs.

Analyses of Governance Indicators Affecting Flow of Foreign Aid: An ARDL Approach

Analyses of Governance Indicators Affecting Flow of Foreign Aid: An ARDL Approach

Idealist, Realist or Neo-Realist Financial Aid Donors to Pakistan

Foreign aid has always been an important source of finance for Pakistan. The flow of foreign aid depends upon the donor’s interest and motives that can differ as some may be truly interested in helping the recipient nation (Mumtaz, 2013). Some donors may have a national interest while others may want to enhance their economic relations which refer to the idealist, realist, and neo-realist theories of motivations respectively (Berthelemy, 2005). The present inquiry is informed by a qualitative interpretive approach based on semi-structured interviews regarding financial aid donor’s motives. The overall results revealed people's perception that America has an inclination for both Pakistan’s nation and region for its own benefits whereas the United Kingdom is interested in human resources. Saudi Arab and China have dual motives, one is the development of Pakistan and the other is security and trade interest respectively. So America is proclaimed as realist donors, United Kingdom as Neo-realist while Saudi Arab and China have mixed motivations. Both are Idealists with some realist and neo-realist motivation correspondingly. However other financial aid donors are not prominent amongst the Pakistani nations.

Foreign Aid and State-Society Relations: Theory, Evidence, and New Directions for Research

A prominent body of scholarship views revenue extraction by the state as a catalyst for the creation of representative institutions. States in the developing world, however, extract less revenue from their citizens than states in wealthy countries. One reason for this discrepancy is the presence of foreign aid. This special issue explores both theoretically and empirically how foreign aid flows affect citizens’ perceptions of and interactions with the state, and what this might imply for the development of state capacity and state-society linkages. Until recently, the conventional wisdom held that foreign aid would undermine these linkages, eroding state legitimacy and impeding the development of state capacity. The contributions in this special issue find limited evidence for such adverse effects. Citizen awareness of aid does not directly undermine state legitimacy or decrease citizen engagement with the state. Aid may, however, reduce state investment in institutions, producing inferior institutional outcomes that challenge citizen confidence and therefore indirectly hinder the growth of state-society linkages. If aid is weakening state-society relations, it is largely because of its effects on state institutions rather than its effects on citizen attitudes or behaviors. The contributions to the special issue use a variety of methods to generate these findings, including single-country surveys, informational experiments, donation games, in-depth interviews, and cross-country analyses. Together they address multiple ongoing debates in the literature on aid and state-society relations, while also pointing to promising avenues for future research.

Harnessing foreign aid for the poor: role of institutional democracy

PurposeThis paper examines the relationship between foreign aid, institutional democracy and poverty. The paper explores the direct effect of foreign aid on poverty and quantifies the facilitating role of democracy in harnessing foreign aid for poverty reduction in Sub-Saharan Africa (SSA).Design/methodology/approachThe paper attempts to address the endogenous relationship between foreign aid and poverty by employing the two-stage least squares instrumental variable (2SLS-IV) estimator by using GDP per capita of the top five Organization for Economic Co-operation and Development (OECD) countries sending foreign aid to SSA countries scaled by the inverse of the land area of the SSA countries to stimulate an exogenous variation in foreign aid and its components. The initial level of democracy is interacted with the senders’ GDP per capita to also instrument for the interaction terms of democracy, foreign aid and its components.FindingsThe results suggest that foreign aid reduces poverty and different components of foreign aid have different effects on poverty. In particular, multilateral source and grant type seem to be more significant in reducing poverty than bilateral source and loan type. The study further reveals that democratic attributes of free expression, institutional constraints on the executive, guarantee of civil liberties to citizens and political participation reinforce the poverty-reducing effects of aggregate foreign aid and its components after controlling for mean household income, GDP per capita and inequality.Research limitations/implicationsThe methodological concern related to modeling the effects of foreign aid on poverty is endogeneity bias. To estimate the relationship between foreign aid, democracy and poverty in SSA, this paper relies on a 2SLS-IV estimator with GDP per capita of the top five aid-sending OECD countries scaled by the inverse of land area of the SSA countries as an external instrument for foreign aid. The use of the five top OECD's Development Assistance Committee (OECD-DAC) countries is due to the availability of foreign aid data for these countries. However, non-OECD-DAC countries such as China and South Africa may be important source of foreign aid to some SSA countries.Practical implicationsThe findings further suggest that the marginal effect of foreign aid in reducing poverty is increasing with the level of institutional democracy. In other words, foreign aid contributes more to poverty reduction in countries with democratic dispensation. This investigation has vital implications for future foreign aid policy, because it alerts policymakers that the effectiveness of foreign aid can be strengthened by considering the type and source of aid. Foreign aid and quality political institution may serve as an important mix toward the achievement of the Sustainable Development Goals 2030 and the Africa Union Agenda 2063.Social implicationsAs the global economy faces economic and social challenges, SSA may not be able to depend heavily on foreign partners to finance the region's budget. There is the need for African governments to also come out with innovative ways to mobilize own resources to develop and confront some of the economic challenges to achieve the required reduction in poverty. This is a vision that every country in Africa must work toward. Africa must think of new ways of generating wealth internally for development so as to complement foreign aid flows and also build strong foundation for welfare improvement, self-reliance and sustainable development.Originality/valueThis existing literature does not consider how democracy enhances the foreign aid and poverty relationship. The existing literature does not explore how democracy enhances grants, loans, multilateral and bilateral aid effectiveness in reducing poverty. This paper provides the first-hand evidence of how institutional democracy enhances the poverty-reducing effects of foreign aid and its components. The paper uses exogenous variation in foreign aid to quantify the direct effect of foreign aid and its components on poverty.

Project design decisions of egalitarian and non-egalitarian international organizations: Evidence from the Global Environment Facility and the World Bank

Foreign aid flows result from agreements reached between states that need resources and other states or international organizations that can provide those resources. Recent literature has argued that different international development organizations bargain with aid-receiving states in particular ways. Specifically, some authors argue that non-egalitarian international development organizations seek to secure more gains when bargaining with economically weak states. Global Environment Facility projects are negotiated by the international agency that will implement the project, allowing us to examine this claim in the context of a set of similar development projects. Correcting and reanalyzing an existing dataset describing the composition of financing in GEF projects, we find no evidence that the financing terms provided by different GEF implementing agencies varies by the type of organization. Both egalitarian and non-egalitarian agencies provide more external funding to poorer countries. We replicate this result using data from development projects financed by the World Bank, the archetypal non-egalitarian international organization. We discuss how our results are consistent with organizational behavior that originates in the interests of an international bureaucracy oriented toward poverty alleviation.

Sorting out the Aid-Corruption Nexus

We employ matching methods to explore the relationships between foreign aid flows and corruption in recipient countries. Data are drawn from recipients of foreign aid for the 1996 to 2013 period. We find no compelling evidence of an effect running from corruption to aid flows. Furthermore, point estimates imply that corruption reforms lead countries to receive less aid. Alternatively, we generally find that, over a 10-year horizon, a sustained increase in aid leads to more corruption in a recipient. It is the sustained nature of an aid increase that seems to be important for this effect. (We generally do not report significant results for large changes in aid that are not sustained over time.)

Aid, Microfinance and income inequality: A global view

This article studies the relationship between foreign aid and microfinance flows and income inequality. Using a broad theoretical framework on inequality, and panel data for 87 countries from 1995 to 2012, we study the dynamics of aid and microfinance and how these relate to income inequality. Our results highlight important differences across world regions and the need to consider specificities of the context when assessing the impact of both aid and microfinance on inequality. In this line, we provide an analysis for three different countries: Bolivia, Bangladesh, and Indonesia.

Non-state actors in state-driven development processes: the case of religious actors and foreign aid flows

ABSTRACTHow should non-state actors engage state-led development processes? This article uses the theological notion of “religious bilinguality” as a conceptual basis for identifying three roles in which religious communities can engage the state-led process of foreign aid distribution. The roles range from being granted to claiming the right of participation. As “guests”, religious actors are able to reinvigorate existing dialogue platforms; as “servants”, they are able to map motivations for foreign aid disbursement; and as “prophets”, religious actors can identify and address discrepancies in the definition and distribution of foreign aid.

Austerity in Africa

Austerity across Africa has been operationalized through World Bank and IMF structural adjustment programs since the 1980s, later rebranded euphemistically as poverty reduction strategies in the late 1990s. Austerity’s constraints on public spending led donors to a “civil society” focus in which NGOs would fill gaps in basic social services created by public sector contraction. One consequence was large-scale redirection of growing foreign aid flows away from public services to international NGOs. Austerity in Africa coincides with the emergence of what some anthropologists call “audit cultures” among donors. Extraordinary data collection infrastructures are demanded from recipient organizations in the name of transparency. However, the Mozambique experience described here reveals that these intensive audit cultures serve to obscure the destructive effects of NGO proliferation on public health systems.

Bilateral aid in sub-Saharan Africa: are donor delivery tactics stimulating economic growth and development?

ABSTRACTThe literature assessing the effectiveness of bilateral foreign aid flows to sub-Saharan Africa primarily focus on one aspect of the aid delivery mechanism that is employed by donors, namely that of channeling aid to recipient central governments. These analyses do not take into account alternative donor delivery tactics of circumventing recipient governments with poor institutional quality – delivering aid to non-state (‘bypass’) actors instead. Thus, the objective of this paper is to extend the aid effectiveness literature by disaggregating bilateral aid flows into both government-to-government aid and bypass aid, and assessing their relative effect on economic growth. Utilising data compiled from multiple data sources including the OECD Credit Reporting Services and World Bank datasets, I find that whereas the effect of government-to-government aid on economic growth is conditional on institutional quality, bypass aid is unconditionally effective.

Friends for the Benefits: The Effects of Political Ties on Sovereign Borrowing Conditions

Do closer political ties with a global superpower improve sovereign borrowing conditions? We use data on voting at the United Nations General Assembly along with foreign aid flows to construct an index of political ties and find evidence that suggests closer political ties leads to both better sovereign credit ratings and lower yields on sovereign bonds. We use heads-of-state official visits and coalition forces troop contributions as exogenous instruments to further strengthen the findings.

ON A QUESTION OF ECONOMIC GROWTH

Economic development looks at a wider range than GDP per capita. Economic development is concerned with how people are actually affected. It looks at their actual living standards and social conditions. Measures of Economic development will look at: Real income per head – GDP per capita; Levels of literacy and education standards; Levels of healthcare (e.g. number of doctors per 1.000 population); Quality and availability of housing; Levels of environmental standards; Levels of infrastructure (transport, communication); Levels of corruption; Educational standards & labor productivity; Labor mobility; Flow of foreign aid & investment; Level of savings & investment; etc.

Foreign aid, human capital and economic growth nexus: Evidence from Nigeria

This study investigates the link between aid and human capital in promoting economic growth of Nigeria. The study used two models; the first model was used to test the validity of the medicine model in Nigeria; while the extended model was used to investigate the effect of aid and human capital shocks on growth using Engle-Granger and Vector Error Correction Model (VECM) estimation techniques respectively. The findings from the first model suggest that persistent increase in foreign aid flows beyond a particular point (the optimal point) may adversely affect growth thus confirming the proposition of the Medicine Model. Evidence from the study’s extended model indicates that growth in Nigeria is sensitive to human capital shock via education while the response from aid shock is trivial in the long run. The mechanism through which aid impacts economies is influenced by many heterogeneous factors, notably; the role played by the recipient governments is often not considered. Our implication from the obtained results is that government expenditures on education with additional inflows of aid can promote economic growth in Nigeria. However, there is also an indication that attainment of economic growth might be challenging for this aid-dependent country.

Does counterterrorism militarize foreign aid? Evidence from sub-Saharan Africa

This article studies whether the pursuit of counterterrorism militarizes foreign aid flows. It focuses on the case of US foreign aid to sub-Saharan African states, which recently have experienced an increase in the presence of al-Qaeda or its affiliate terrorist organizations. This article argues that as terrorist groups carry out attacks inside a state’s territory, aid towards that state will serve such counterterrorism goals. For one, the state’s executive branch will receive increased military aid to immediately fight al-Qaeda or affiliates. For the other, the United States also steps up aid for civil society and development, which could over time undermine al-Qaeda’s mobilization and recruitment efforts. In an empirical analysis that covers 46 African states from 1996 to 2011, our results largely corroborate the hypothesized patterns for attacks that occur on a country territory and in the neighborhood. We note, though, that the overall composition of aid shifts relative to the military when there are direct attacks, something that does not occur when attacks happen in the neighborhood only. Our article concludes that concerns about militarization of aid are warranted, but that actual manifestations are nuanced.

Confucius Institutes and FDI flows from China to Africa

Is the establishment of new Confucius Institutes (CIs) in African countries motivated by resource seeking? We focus on uncovering new empirical evidence about the establishment of CIs, whether they are related to natural resources, and the extent to which the establishment of new CIs and Chinese foreign aid flows affect one another. Whereas Chinese aid flows do indeed appear to be empirically associated with African countries' natural resources, the evidence we report suggests that CIs are established based on a distinct set of motives. We find that CIs, Chinese foreign aid flows to Africa and natural resources have joint predictive power on the subsequent year's Chinese FDI outflows. CIs are not, however, positively associated with the subsequent year's aid flows. And aid flows are not positively associated with the subsequent year's expected number of CIs. We interpret this as evidence that CIs reflect an economically significant expression of Chinese soft power. The goals underlying the expression of this soft power are not subsumed by natural resource seeking and are not easily compressed to a single dimension. The data show that CIs and aid flows are not positive predictors of each other and are not subsumed (i.e., made to disappear) by the inclusion of controls for natural resources. Thus, the presence of a CI reveals independent, novel, and economically significant information about future trade flows that cannot be explained away by differences in resources or other control variables commonly found in empirical models of trade flows. The empirical evidence suggests that CIs are indeed an effective instrument for increasing China's soft power but that this soft power is not motivated solely (if at all) by resource seeking.

Aid, Catastrophes and the Samaritan's Dilemma

This paper analyses the impact of past foreign aid on the recipient country's preparedness against natural disasters. We estimate the impact of past foreign aid on the occurrence of natural disasters and the death toll from disasters using data from 5089 major natural disasters in 81 developing countries between 1979 and 2012. The results suggest that past foreign aid flows crowd out the recipient's incentives to provide protective measures that decrease the likelihood and the societal impact of a disaster. The crowding‐out effect appears to be stronger in developing countries that are relatively poorer and have weaker political institutions.

Hands Off My Regime! Governments’ Restrictions on Foreign Aid to Non-Governmental Organizations in Poor and Middle-Income Countries

Many resource-strapped developing country governments seek international aid, but when that assistance is channeled through domestic civil society, it can threaten their political control. As a result, in the last two decades, 39 of the world’s 153 low- and middle-income countries have adopted laws restricting the inflow of foreign aid to domestically operating nongovernmental organizations (NGOs). Governments recognize that such laws harm their international reputations for supporting democracy and may invite donor punishment in terms of aid reductions. Yet, they perceive foreign aid to NGOs as supporting political opponents and threatening their grip on power. In the aftermath of competitive electoral victories, governments often take new legal steps to limit these groups’ funding. We test this argument on an original dataset of laws detailing the regulation of foreign aid inflows to domestically operating NGOs in 153 low- and middle-income countries for the period 1993–2012. Using an event history approach, we find that foreign aid flows are associated with an increased risk of restrictive law adoption; a log unit increase in foreign aid raises the probability of adoption by 6.7%. This risk is exacerbated after the holding of competitive elections: the interaction of foreign aid and competitive elections increases the probability of adoption by 11%.

Business Cycle Shocks to Foreign Aid Flows

We propose a new method to construct instruments for foreign aid flows that exploits business cycle fluctuation in donor countries. In addition, we present empirical results demonstrating that the first step required to produce these instruments is both feasible given the available data and promising based on how strongly predictive donor country economic circumstances are for the size of aid flows.

Which Form of Foreign Capital Inflows Enhance Economic Growth? Empirical Evidence in Sub-Saharan Africa

Empirically, results from time series and cross country studies have identified foreign capital inflows to play a pivotal role in the growth process of host countries. The goal of this paper is to examine the impact of three of the four forms of foreign capital inflows (which include foreign aid, foreign direct investment and personal remittances) on economic growth in SSA. This goal was achieved by using a panel data from 1990-2010 and the newly established pooled mean group (PMG) estimator for dynamic heterogeneous panels. The results of the study indicate that all the three forms of foreign capital inflows have positive and significant impacts on economic growth in the long run. However, personal remittances was the only short run driver of growth in SSA. The study recommends the design and implementation of good fiscal, monetary and trade policies to complement the flow of foreign aid to the country for the realization of its full impact on growth. Furthermore, the study recommends SSA countries to build strong and well-functioning domestic institutions to unlock the potential for remittances to strongly contribute to growth.