General budget support as an aid instrument-Impact on economic growth

Kaisa Alavuotunki; Susanna Sandström

doi:10.1111/rode.12535

General budget support as an aid instrument-Impact on economic growth

Kaisa Alavuotunki^*
, Susanna Sandström

^*Corresponding author for this work

Department of Economics

Åbo Akademi University

Research output: Contribution to journal › Article › Scientific › peer-review

3 Citations (Web of Science)

Abstract

Since the change of the new millennium, general budget support (GBS) has become a prominent, yet controversial and heavily debated, modality for delivering aid. We study GBS as an aid instrument from a cross-country perspective. We examine if any growth impacts can be identified as a result of the use of GBS. We use data covering nine 4-year intervals from 1976 to 2011. We modify two supply-side IV strategies from previous aid-growth literature. In our main approach, we employ an interaction of an exogenous supply-side variable (donor government fractionalization) and an endogenous variable (probability of receiving GBS) as an instrument for GBS, and in the alternative approach we construct an instrument following a supply-side approach. Our results suggest that GBS receiving countries have grown faster than countries receiving other types of aid. Selection bias does not explain this result. The growth effect is not only attributed to lagged GBS but also to contemporaneous GBS flows.

Original language	English
Pages (from-to)	231-255
Number of pages	25
Journal	Review of Development Economics
Volume	23
Issue number	1
Early online date	10 Sept 2018
DOIs	https://doi.org/10.1111/rode.12535
Publication status	Published - Feb 2019
MoE publication type	A1 Journal article-refereed

Funding

Financial support from Bröderna Lars och Ernst Krogius forskningsfond and the Yrjö Jahnsson Foundation is gratefully acknowledged. We wish to thank Markus Jäntti, Pertti Haaparanta, Sam Jones, and Jukka Pirttilä for comments. Financial support from Bröderna Lars och Ernst Krogius forskningsfond and the Yrjö Jahnsson Foundation is gratefully acknowledged. We are also very grateful to the referees for their constructive input. Arndt, C, Jones, S., & Tarp, F. (2015). Assessing foreign aid's long‐run contribution to growth and development. World Development, 69(C), 6–18. Bandstein, S. (2007). What determines the choice of aid modalities? A framework for assessing incentive structures. Swedish Agency for Development Evaluation (SADEV) Report, No. 4. Karlstad, Sweden. Bigsten, A., Platteau, J. P., & Tengstam, S. (2011). The aid effectiveness agenda: The benefits of going ahead. Draft Final Report, August 16, 2011. European Commission, Brussels. Boone, P. (1996). Politics and the effectiveness of foreign aid. European Economic Review, 40(2), 289–329. Brech, V., & Potrafke, N. (2014). Donor ideology and types of foreign aid. Journal of Comparative Economics, 42 (1), 61–75. Brückner, M. (2013). On the simultaneity problem in the aid and growth debate. Journal of Applied Econometrics, 28(1), 1–175. Burnside, C., & Dollar, D. (2000). Aid, policies and growth. American Economic Review, 90(4), 847–868. Cerqueti, R., Coppier, R., & Piga, G. (2012). Corruption, growth and ethnic fractionalization: A theoretical model. Journal of Economics, 106(2), 153–181. Clemens, M. A., & Bazzi, S. (2009). Blunt instruments: On establishing the causes of economic growth. Center for Global Development Working Paper No. 171, Washington, DC. Clemens, M. A., Radelet, S., Bhavani, R. R., & Bazzi, S. (2012). Counting chickens when they hatch: Timing and the effects of aid on growth. Economic Journal, 122(561), 590–617. Dreher A., & Langlotz, S. (2015). Aid and growth. New evidence using an excludable instrument. CEPR Discussion Paper No. DP10811. Centre for Economic Policy Research, London. Easterly, W., & Levine, R. (1997). Africa's growth tragedy: Policies and ethnic divisions. The Quartery Journal of Economics, 112(4), 1203–1250. Galiani, S., Knack, S., Xu, C., & Zou, B. (2014). The effect of aid on growth: Evidence from a quasi-experiment. Policy Research Working Paper No. 6865. World Bank, Washington, DC. Glennie, J., & Sumner, A. (2014). The $138.5 billion question: When does foreign aid work (and when doesn't it)? Center for Global Development Policy Paper No. 49, Washington, DC. IDD and Associates. (2006). Joint evaluation of general budget support: Synthesis report. Study undertaken by IDD and Associates for the OECD. University of Birmingham, U.K. Jackson, O. (2014). Natural disasters, foreign aid and economic growth (Working Paper). Retrieved from SSRN: https://doi.org/10.2139/ssrn.2329404. Lawson, A., Kipokola, J., Ruffer, T., Tidemand, P., Paul, E., & Bartholomew, A. (2013). Joint evaluation of budget support to Tanzania: Lessons learned and recommendations for the future. Independent evaluation jointly man-aged by the European Commission, the Ministry of Foreign Affairs of Denmark, Irish Aid, the Ministry of For-eign Affairs of the Netherlands and the Ministry of Finance of Tanzania. Mayer, T., & Zignago, S. (2011). Notes on CEPII's distances measures: The GeoDist database (CEPII Working Paper 2011-25). CEPII, Paris. Mekasha, T., & Tarp, F. (2013). Aid and growth. What meta‐analysis reveals. Journal of Development Studies, 49 (4), 564–583. Mosley, P. (1987). Overseas aid: Its defence and reform. Brighton, U.K.: Wheatsheaf Books. Nizalova, O., & Murtazashvili, I. (2016). Exogenous treatment and endogenous factors: Vanishing of omitted vari-able bias on the interaction term. Journal of Econometric Methods, 5, 71–77. Nunn, N., & Qian, N. (2014). US food aid and civil conflict. American Economic Review, 104(6), 1630–1666. Rajan, R. G., & Subramanian, A. (2008). Aid and growth: What does the cross‐country evidence really show? The Review of Economics and Statistics, 90(4), 643–665. Rajan, R. G., & Subramanian, A. (2011). Aid, Dutch disease, and manufacturing growth. Journal of Development Economics, 94(1), 106–118. Roodman, D. (2013). Net aid transfers data set (1960–2013). Retrieved from http://davidroodman.com/data/ Roubini, N., & Sachs, J. D. (1989). Political and economic determinants of budget deficits in the industrial democra-cies. European Economic Review, 33(5), 903–933. Scartascini, C., & Crain, W. M. (2002). The size and composition of government spending in multi-party systems (Working Paper). Retrieved from SSRN: https://doi.org/10.2139/ssrn.1353462. Staiger, D., & Stock, J. H. (1997). Instrumental variables regression with weak instruments. Econometrica, 65(3), 557–586.

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 8 Decent Work and Economic Growth

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10.1111/rode.12535

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abstract = "Since the change of the new millennium, general budget support (GBS) has become a prominent, yet controversial and heavily debated, modality for delivering aid. We study GBS as an aid instrument from a cross-country perspective. We examine if any growth impacts can be identified as a result of the use of GBS. We use data covering nine 4-year intervals from 1976 to 2011. We modify two supply-side IV strategies from previous aid-growth literature. In our main approach, we employ an interaction of an exogenous supply-side variable (donor government fractionalization) and an endogenous variable (probability of receiving GBS) as an instrument for GBS, and in the alternative approach we construct an instrument following a supply-side approach. Our results suggest that GBS receiving countries have grown faster than countries receiving other types of aid. Selection bias does not explain this result. The growth effect is not only attributed to lagged GBS but also to contemporaneous GBS flows.",

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General budget support as an aid instrument-Impact on economic growth

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