Does Political Instabilityin Developing Countries Attract More Foreign Aid?

Presented ByAyush Nepal

Barsha ShresthaChhokpa SherpaPrakash PandeyPramila Nepal

IntroductionPolitical Factor – Influencing Aid AllocationInvestigation – Panel ApproachModels Fixed Effect Random Effect Approach

Net per Capita ODA among 50 developing countries period 1990-2012.

8 Risk Indices used5 significant impact on aid allocation Indicators of Governance = 4 Indicator of Internal Conflict 5th

Effect on donors’ allocation of aid

Literature Review Cline and Sargen (1975), Aid allocation that addresses recipients’ needs

also has to reward good economic performers/policies through positive incentives.

McKinley and Little, (1978) Foreign aid being allocated based on recipient countries need or donors strategic or political interest.

Burnside and Dollar, (2000) Multilateral aid in particular World Bank aid considers recipients’ “good economic policies” but that bilateral aid does not.

Guillaumont & Chauvet, (2001)Countries that are more vulnerable must receive more aid.

Collier and Dollar (2002), Aid is poverty-efficient in a good policy environment.

Objective of the Study

To study about the Disbursement of Official Development Assistance.

To elucidate the type of Political Risk & Recipient Countries characteristics.

To identify and analyze the impact of political instability during the aid allocation.

Regression Equation Based on Fixed Effect

ModellnACAPit=α i+ β1 Rjit + β2 Nit + β3Sit + β4 Mit+ β5

lnPit +εit

Where,ACAPit = Dependent aid per capita variable

Rjit = Risk indices (j =kind of risk),

Nit = Set of recipient countries’ needs

Sit = Donors strategic interest

Mit = Merit variables

Pit = Recipient countries populations.

Regression Equation Based on The Insight of

The Random Effect Model lnACAPit=α + β1Rjit + β2Nit+ β3Sit+ β4Mit+

β5lnPit + μit + εit

Empirical Results Analyzing the

Determinants of Foreign Aid

Oil Exporter - Significantly Positive Correlation.

Per Capita/GDP/PPP- Significantly Negative Correlation.

Population - Significantly Negative Correlation.

Trade & Democracy- Significantly Negative Correlation.

Empirical ResultsAnalyzing the Variable of Interest:

Impact of Each Variable on Foreign Aid

Government Stability (Case 1)Significantly Positive

Law and Order (Case 3) Significantly Positive

Bureaucratic Quality (Case 4) Significantly Positive

Corruption (Case 5) Significantly Negative

Empirical ResultsEthnic Tension

An Index used to Proxy Internal Conflict.

Measures the Degree of Tension.

Index - A Significantly Positive Influence.

Aid Sufficiently Fungible into Military Expenditure.

A Positive Association Between Ethnic Tension & Aid

Flow.

Index Signals Donor’s Strategic Motive or Altruistic

Behavior.

Compared Testing: Fixed Effect Model V/S Random

Effect Model

Five Risk Indices Under Fixed Effect Model and Random

Effect Model.

Hausman Specification Test.

Reject Null Hypothesis because the Preferred Model has

Fixed Effect.

For all the Five Risk Indices Exerting Significant Influence

on Aid.

Random Effect Model is The Preferred Model.

Empirical Results

Military in Politics, Religion in Politics &

Socio-economic Condition

Treated as a merit/demerit variable

Socioeconomic - need variable or a merit variable

Exert no influence in donors’ allocations of aid

Donors are indifferent towards recipients experiencing autocracy,

lack of civil liberty or political right.

Purpose of ODA

Addressing the need of the poor nation

Insignificant relationship between aid inflow and this index signals.

Empirical Results

There exists direct or indirect influence of eight risk

indices on donor’s allocation of aid.

Aid allocation is highly influenced by instability of

the receiving country.

Disbursement of ODA is highly determined by the

political risk factor.

Donors have significantly high self interest.

Aid may be motivated by altruistic reasons or self

interest.

Conclusion

Thank

You!!!