Can aid for financial sector buy financial development?

Maruta, Admasu Asfaw

doi:10.1016/j.jmacro.2018.11.003

Cited by 26 publications

(9 citation statements)

References 45 publications

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“…can help attract greater foreign private flows, which are essential to economic growth. A recent study found that foreign aid has a significant positive effect on financial development and thus enhance access to finance for small and medium enterprises and boost economic growth (Maruta, 2019). Finally, foreign aid can reduce poverty and income inequality (Kaya, Kaya, & Gunter, 2013; Shafiullah, 2011), which are key to sustained long‐term growth, and help developing countries to better mobilise domestic revenue and finance development‐related spending (Clist, 2016; Clist & Morrissey, 2011).…”

Section: Brief Review Of the Literaturementioning

confidence: 99%

Aid, growth and institutions in Sub‐Saharan Africa: New insights using a multiple growth regime approach

2020

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However, as pointed out by Guillaumont and Guillaumont-Jeanneney (2006a), introducing squared and cubic aid terms could make it difficult to simultaneously treat possible conditional effects of aid. Furthermore, studies employing threshold models assume that the threshold is the same for all countries, which can be problematic given the very specific circumstances of recipient countries (Guillaumont & Guillaumont-Jeanneney, 2006a, 2006b). Moreover, on the interactive variable between foreign and institutional variables, Dalgaard and Hansen (2001) and Easterly (2003) highlighted that this specification does not allow disentangling the effects of aid and institutions on growth given that institutions themselves affect growth. Our paper proposes an innovative view by incorporating the possibility of heterogeneous effects of foreign aid in a general and unspecified way, and then exploring whether the quality of institutions is the source of such unobserved heterogeneity. We assume that there are multiple growth regimes and that the impact of foreign aid on growth differs across regimes. The approach allows us to study the role of governance by estimating whether the quality of governance affects the probability for a country to be in a given growth regime. Previous studies used traditional econometric models (OLS, IV, GMM) which impose a single model in the sample, and thus assume that the effect of foreign aid is constant across the distribution. These models also disregard the possibility that heterogeneity may exist along the distribution of the outcome itself. We employ a finite mixture model, which relaxes the assumption of a single model and allows unobserved heterogeneity in the sample. The finite mixture model incorporates a latent variable to classify countries into different classes or regimes, and enables any possible unobserved heterogeneity that may exist to be incorporated. In this semi-parametric model, countries are sorted into regimes or classes depending on the similarity of the conditional distribution of their growth rates given all the observed explanatory variables (Deb & Gregory, 2016; Konte, 2013). Finite mixture models are formulated to identify heterogeneous effects, if they exist, and characterise that heterogeneity along dimensions of the outcome distribution, observed characteristics and unobserved characteristics. These models are increasingly applied to different topics including health (

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Section: Brief Review Of the Literaturementioning

confidence: 99%

Aid, growth and institutions in Sub‐Saharan Africa: New insights using a multiple growth regime approach

2020

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“…This, turn, would lead to greater trade openness. Further, as development aid targeted to the financial sector promotes financial development(Maruta 2018) and financial development could positively influence trade openness(Svaleryd and Vlachos 2002, Kim et al 2010), we infer that development aid for the financial sector could result in higher trade openness.Summing up, development aid could positively or negatively influence trade openness depending on whether the aforementioned positive effects dominate its eventual negative effect on exports through the appreciation of the real exchange rate.6) See a literature review on the subject matter in Abby and Nio-Zarazua (2016). 7) A comprehensive literature review on the effect of development aid on health outcomes could be found inKotsadam et al (2018).…”

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confidence: 79%

Tax Reform and Trade Openness in Developing Countries

Gnangnon

2019

Journal of Economic Integration

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Developing countries are confronted with the progressive erosion of their trade tax revenue, which then reduces their total tax revenue. In light of the unavoidable process of trade liberalization, such countries have engaged in tax transition reform to change their tax revenue structure in favor of domestic tax revenue. The current analysis uses a measure of tax transition reform (tax reform) to examine whether countries that engage in tax reform experience greater trade openness. The empirical analysis covers 92 developing countries from 1980 to 2014 and shows that tax reform is positively associated with trade openness. Interestingly, least developed countries (LDCs) appear to enjoy a higher effect of tax reform on trade openness than non-LDCs do. This is confirmed by a more general picture that shows how less advanced developing countries enjoy a higher positive effect of tax reform on trade openness than relatively advanced developing countries do.

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“…Incidentally, some few studies have recently looked at the effects of aid to the nancial sector (which is part of total AfT ows) on nancial development. Specially, Maruta (2019) has obtained empirically that aid for the nancial sector promotes nancial development in recipient-countries. Agapova and Vishwasrao (2020) have uncovered empirically that while foreign aid to the nancial sector increases public sector borrowing, it has not generated bene ts for nancial intermediation in the private sector.…”

Section: Theoretical Discussionmentioning

confidence: 99%

“…At the same time, the literature on the determinants of nancial development has paid little attention to the effect of development aid on nancial development. One of the very scarce studies on the matter is the work by Maruta (2019) who has examined the effect of development aid in favour of the nancial sector on nancial development. The author has reported empirical evidence that aid in favour of the nancial sector has exerted a positive effect on nancial development.…”

Section: Introductionmentioning

confidence: 99%

Effect of Aid for Trade on Financial Development: Exploring the Channel of Manufactured Exports

Gnangnon

2021

Preprint

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Many studies have considered the macroeconomic effects of Aid for Trade (AfT) flows, that is, the part of official development assistance allocated for the development of the trade sector. The present paper aims to expand this literature by investigating the effect AfT flows on financial development notably through channel of manufactured exports. The analysis has covered a set of 120 countries over the period 2002–2017, and relied primarily on the two-step system Generalized Methods of Moments (GMM). Results show that total AfT flows, notably its components AfT for economic infrastructure and AfT for productive capacity promote financial development, and the magnitude of these positive effects rises as countries' share of manufactured exports increases. Additionally, total AfT flows influence positively financial development in countries that diversify their export product basket towards manufactured exports. These findings highlight the key role of AfT flows in promoting financial development in recipient-countries, and therefore call on donor-countries to scale up AfT flows in favour of developing countries, given the importance of financial development for economic development.

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Can aid for financial sector buy financial development?

Cited by 26 publications

References 45 publications

Aid, growth and institutions in Sub‐Saharan Africa: New insights using a multiple growth regime approach

Aid, growth and institutions in Sub‐Saharan Africa: New insights using a multiple growth regime approach

Tax Reform and Trade Openness in Developing Countries

Effect of Aid for Trade on Financial Development: Exploring the Channel of Manufactured Exports

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