Aid Modalities and Budgetary Response: Panel Data Evidence

Abstract

Aid heterogeneity, public sector, panel data,

Foreign Aid Heterogeneity: Issues and Agenda

“…Both donors and recipients bear major responsibility in this respect. As Mavrotas and Ouattara (2007) stress in their paper, the issue of aid heterogeneity becomes more important than ever in the context of recent calls for scaling up aid and concerns associated with such a "big push" approach in aid giving (although not yet materialized). Different aid modalities and instruments have different effects on aid recipients and this should crucially inform the international public debate on the need to revamp the current aid architecture.…”

“…Similar to Mavrotas and Ouattara (2007), Cassimon and Van Campenhout (2007) draw on recent advances in the fiscal response literature to analyze the fiscal effects of debt relief, compared to other forms of aid, in a vector autoregressive framework. The focus is on a panel of 28 Heavily Indebted Poor Countries (HIPC).…”

“…Mavrotas and Ouattara (2007) as well as Cassimon and Van Campenhout (2007) focus on important transmission mechanisms, notably the public finance responses to aid. Aid is disaggregated in several ways, either by analyzing sector-specific aid (Thiele et al 2007;Asiedu and Nandwa 2007;Wolf 2007) and aid categories that may be considered pro poor (Pettersson 2007), or by assessing different modes through which aid is delivered (Jain 2007;Mavrotas and Ouattara 2007;Cassimon and Van Campenhout 2007;Cohen et al 2007). …”

“…Aid tends to be biased toward project assistance, even if budget support is more efficient in supporting the economic development of recipients, once it is taken into account that (i) aid agents are self-interested and may derive higher utility from project aid and (ii) voters in the donor country have insufficient information on whether agents are of the "bad" (selfish) or "good" (altruistic) type. Mavrotas and Ouattara (2007) examine the budgetary effects of aid financing on the behavior of recipient governments by distinguishing between two major types of aid, namely project aid and financial program aid within the context of a fiscal response model which also allows for aid heterogeneity. They subsequently test the solution of the model using panel data techniques for a large sample of 106 aid-recipient countries spanning the period 1970-2001.…”

“…Empirical results based on a single figure of aid may also be blurred once it is taken into account that both donor agencies and aid recipient governments attach different utility to different aid categories (see Jain (2007) as well as Mavrotas and Ouattara (2007) in this issue). Furthermore, aid heterogeneity is clearly an issue if the composition of aid changes over time and differs considerably across recipient countries.…”