P
OVERTY
AND
F
OREI GN
A
I D
E
VI DENCE
FROM
R
ECENT
C
ROSS
- C
OUNTRY
D
ATA
A
BUZARA
SRA, G
EMMAE
STRADA, Y
ANGSEONK
I M,
ANDM.G. Q
UI BRI AMarc h 2005
Abuzar Asra is Se nio r St at ist ician, Eco no mics and Re se arch De part me nt , Asian De ve lo pme nt Bank; Ge mma Est rada is St aff Co nsult ant , Eco no mics and Re se arch De part me nt , Asian De ve lo pme nt Bank; Yangse o n Kim is Le ct ure r, East We st Ce nt e r, Unive rsit y o f Hawaii; and M. G. Quibria is Adviso r, Ope rat io ns Evaluat io n De part me nt , Asian De ve lo pme nt Bank.
Asian De ve lo pme nt Bank P. O. Bo x 789
0980 Manila Philippine s
©2005 by Asian De ve lo pme nt Bank Marc h 2 0 0 5
ISSN 1655- 5252
CONTENTS
Abstrac t vii
I. I ntro d uc tio n 1
I I . Empiric al Framewo rk and Estimatio n Issues 3
III. Data 5
A. Time Variant 5
B. Time Invariant 7
IV. Empiric al Analysis 9
A. Equatio ns 1 to 4: Witho ut Interac tio ns 9
B. Equatio ns 5 to 9: With Interac tio ns 9
V. Co nc lusio ns 1 8
I . I NTRODUCTI ON
The re are fe w to pic s in de ve lo pme nt e c o no mic s that have g arne re d as muc h c o ntro ve rsy as the issue o f aid e ffe c tive ne ss. In the last 40 ye ars o r so , a large lite rature has e me rge d o n the to pic but with fe w firm c o nc lusio ns.1 The lite rature has be e n marke d by a wide dive rsity o f appro ac he s,2
o ften emphasizing widely divergent and co ntradicto ry co nclusio ns. The earlier literature has highlighted the c ritic al impo rtanc e o f fo reig n assistanc e in e c o no mic de ve lo pment. This has be e n c o difie d in the famo us two - g ap theo ry, which states that aid pro mo tes eco no mic develo pment by relaxing saving s and fo reign- exchange co nstraints to capital fo rmatio n and eco no mic gro wth ( Chenery and Stro ut 1966) . The o ptimism and e nthusiasm o f the two - g ap lite rature has, ho we ve r, be e n sho rt live d. It has g ive n way to wide spre ad ske ptic ism that has appe are d in the mo re re c e nt lite rature. In additio n to the mainstream eco no mics literature, aid has many ideo lo g ical detracto rs bo th fro m the left and the right. Inde e d, the se ide o lo g ic al c ritic s o f the le ft and the rig ht are unite d in the ir o ppo sitio n to fo reig n
assistance, which is co nsidered co unterpro ductive and o ften harmful.3 Ho wever, this perspective co ntrasts
with the mainstre am e c o no mic lite rature, whic h is mo re e vide nc e - b ase d and draws o n rig o ro us quantitative analytic al tec hniques. Co nsequently, the mainstream ec o no mic s literature has been mo re g uarde d and te ntative in its c o nc lusio ns.
A se e ming parado x that the aid e ffe c tive ne ss lite rature has thro wn up is the c o ntradic tio n in the finding s be twe e n mic ro - le ve l and mac ro - le ve l studie s. Ac c o rding to the po ste valuatio n studie s repo rted by aid agenc ies, a large majo rity o f the do no r- spo nso red investment pro jec ts are suc c essful, with hig h e c o no mic re turns and sustainable be ne fits.4 Ho we ve r, the quantitative studie s that re ly
o n cro ss- co untry gro wth regressio ns do no t o ften yield a ro bust relatio nship between aid and eco no mic g ro wth. This mic ro - mac ro parado x, a name due to Mo sle y ( 1987) , has he lpe d to ig nite a go o d de al o f re se arc h inte re st amo ng e c o no mists. Mic halo po ulo s and Sukhatme ( 1989) and White ( 1992) , who have surve ye d the e arlie r c ro ss- c o untry re g re ssio n- base d lite rature, attribute this se e ming parado x
to co nceptual, data, and technical eco no metric pro blems.5 They further co nclude that the cro ss- co untry
e videnc e is ambig uo us.
1 Se e Hanse n and Tharp ( 2 0 0 0 ) , Easte rly ( 2 0 0 3 ) , and Quib ria ( 2 0 0 4 ) fo r re c e nt re vie ws o f the lite rature .
2 So me are mic ro - le ve l studie s while o the rs are mac ro , and ag g re g ative ; so me o f the se studie s are fo c use d o n a sing le co untry while o thers take a co mparative cro ss- co untry perspective; so me studies rely o n a bro ad qualitative, interdisciplinary frame wo rk; o the rs use so phistic ate d quantitative te c hnique s.
3 The c ritic s o f the left arg ue that the real o bjec tive o f aid is to extend and perpetuate internatio nal c apitalism and suppo rt the po litic al ag e nda o f the ne o - c o lo nial po we rs— and no t to he lp the po o r and disadvantaged. The c ritic s o f the rig ht argue that aid helps to extend the po wer o f the state to sustain bureaucratic centralism and hampers eco no mic develo pment. 4 This fac t is e vide nt fro m po ste valuatio n re po rts o f all majo r multilate ral de ve lo pme nt institutio ns suc h as ADB, Inte r-Ame ric an De ve lo pme nt Bank, and the Wo rld Bank ( se e, fo r example, ADB 2002) . This has also be e n hig hlig hte d in the re vie w o f Casse n and Asso c iate s ( 1994) .
Afte r a pe rio d o f re lative lull, the de bate o n aid e ffe c tive ne ss has pic ke d up ag ain in re c e nt ye ars. Appe aling to a se t o f c ro ss- c o untry re g re ssio n re sults, Bo o ne ( 1996) has arg ue d that aid is ine ffe c tive be c ause it te nds to financ e c o nsumptio n rathe r than inve stment.6 Subse que ntly, a muc h
publicized paper by Burnside and Do llar ( 2000) pro vides further, albeit qualified, suppo rt to the Bo o ne co ntentio n. By inco rpo rating eco no mic po licies into the reg ressio n equatio n and explicitly intro ducing an aid- po lic y inte rac tio n te rm, Burnside and Do llar c o nc lude that if aid is ac c o mpanie d b y go o d mac ro e c o no mic po lic ie s, it has a sig nific ant po sitive e ffe c t o n g ro wth. This, ho we ve r, streng the ns the c ase fo r targe ting aid to c o untrie s that have made impro ve me nts in e c o no mic po lic y. The re sults o f Burnside and Do llar7 have re c e ive d wide atte ntio n be c ause o f its appare nt plausibility and ability
to pro vide a re so lutio n o f the mic ro - mac ro parado x.
In re ac tio n to the Burnside and Do llar pape r, a numbe r o f re c e nt pape rs have e me rge d that examine the pape r’s ro bustne ss. The se pape rs inc lude Hanse n and Tarp ( 2001) , Dalg aard and Hanse n ( 2001) , Le nsink and White ( 2001) , and Easte rly e t al. ( 2004) . Hanse n and Tarp ( 2001) find that aid has a po sitive but diminishing impact o n eco no mic gro wth. Ho wever, they find that this estimated impact is hig hly sensitive to the cho ice o f the estimato r— that is, whether it is Ordinary Least Squares ( OLS) o r Ge ne ralize d Me tho d o f Mo ments ( GMM) re g re ssio n— and the se t o f c o ntro l variable s. Fo r example, whe n the y c o ntro l fo r inve stme nt and human c apital, the y find no po sitive e ffe c t o f aid. Dalg aard and Hanse n ( 2 0 0 1 ) use the same mo de l spe c ific atio n as we ll as the data o f Burnside and Do llar. The y find that the princ ipal Burnside and Do llar c o nc lusio n— that the impac t o f aid is c o nting ent o n the mac ro ec o no mic enviro nment— is no t ro bust. It c ritic ally depends o n the c ho ic e o f o bse rvatio ns. The y no te that the five influe ntial o bse rvatio ns that Burnside and Do llar e xc lude fro m the ir pre fe rre d re g re ssio ns have a c ritic al be aring o n the re sults. With a diffe re nt c ho ic e o f o b se rvatio ns that re ly o n e qually valid and standard re g re ssio n diag no stic s, unlike Burnside and Do llar the y find that aid has a sig nific ant po sitive impac t o n e c o no mic g ro wth. The y also no te that the Burnside and Do llar data sug g e st a no nline ar re latio n be twe e n g ro wth and aid, implying diminishing re turns to aid. Le nsink and White ( 2001) also do no t find any e mpiric al c o rro bo ratio n in favo r o f the Burnside and Do llar pro po sitio n that aid is mo re e ffe c tive in a g o o d mac ro e c o no mic po lic y e nviro nme nt. The ir re sults pro vide suppo rt fo r the no tio n that the re are diminishing re turns whe n the le ve l o f aid inflo w is hig h. Ho we ve r, the se e mpiric al re sults se e m to be se nsitive to the se le c tio n o f c o untrie s as we ll as to mo de l spe c ific atio n.
Tho ug h all the abo ve me ntio ne d studie s raise que stio ns abo ut the ro bustne ss o f the Burnside and Do llar finding s, the c ritique o f Easte rly e t al. ( 2004) ho we ve r was the mo st de vastating . The y to o k a diffe rent but simple r ro ute to ro bustne ss. The y re taine d the Burnside and Do llar mo de l and the me tho do lo g y, but adde d ne w data that we re no t available to Burnside and Do llar. The y find that
6 Bo o ne de rive s his re sults fro m pane l data re g re ssio ns base d o n a sample o f 90 c o untrie s c o ve ring o ve r 20 ye ars. The validity o f the e mpiric al re sults o f Bo o ne has be e n wide ly que stio ned. A numbe r o f e mpiric al studie s, whic h are in many ways similar to that o f Bo o ne in te rms o f o ve rlapping sample s and e stimatio n me tho ds, do find a po sitive impac t o f fo re ig n assistanc e.
SECTI ON I I EMPI RI CAL FRAMEWORK AND ESTI MATI ON ISSUES
o nc e the ne w data are adde d, the sig nific ant re latio nship b e twe e n “ g ro wth” and “ aid and po lic y interactio n” ceases to exist. In o ther wo rds, by applying the mo del to a larger dataset, they demo nstrate that this muc h- to uted pro po sitio n— that fo reig n aid will enhanc e ec o no mic g ro wth o nly in c o untries with go o d po lic ie s— is e mpiric ally all to o frag ile.
The pre se nt study lo o ks at aid e ffe c tive ne ss fro m a pe rspe c tive diffe re nt fro m that o f the e arlie r studie s disc usse d abo ve. Vie wing po ve rty reduc tio n as the me tric fo r me asuring de ve lo pme nt, this pape r explo re s the ro le o f fo re ig n aid in addre ssing po ve rty. The use o f po ve rty re duc tio n as the me tric fo r me asuring de ve lo pme nt was mo tivate d by the re c e nt shifts in e mphasis o f the inte rnatio nal de ve lo pme nt c o mmunity. Inte rnatio nal de ve lo pme nt age nc ie s have in re c e nt ye ars fo c use d o n po ve rty re duc tio n, as o ppo se d to e c o no mic g ro wth, as the o ve rarc hing g o al o f e c o no mic develo pment. This is reflec ted in the ado ptio n o f the Millennium Develo pment Go als as the o bjec tive o f the inte rnatio nal c o mmunity, as we ll as in the visio n state ments o f the multilate ral de ve lo pme nt inst it ut io ns. Fo r e xamp le, t he Wo rld Bank e nvisio ns “ a wo rld f re e o f p o ve rt y” and t he Asian De ve lo pme nt Bank has ado pte d po ve rty re duc tio n as its o ve rarc hing de ve lo pme nt o b je c tive. In lig ht o f this, it is appro priate that an e nquiry o n aid e ffe c tive ne ss sho uld be frame d in te rms o f po ve rty re duc tio n than e c o no mic g ro wth.
This is the first study to lo o k at the que stio n o f the e ffe c tive ne ss o f fo re ig n aid fro m the pe rspe c tive o f po ve rty re duc tio n.8 In partic ular, the study trie s to answe r suc h que stio ns as: Ho w
do e s aid affe c t po ve rty re duc tio n? Do e s aid e ffe c tive ne ss de pe nd o n the size o f aid? Do e s aid e ffe c tive ne ss vary by re g io n? What me asure s c an c o untrie s take to impro ve aid e ffe c tive ne ss? What is the ro le o f quality o f go vernance in po verty reductio n? To what extent is aid effectiveness dependent upo n po lic y? Give n the vario us data c o nstraints and the explo rato ry nature o f the pre se nt exe rc ise, the e mpiric al answe rs to the ab o ve que rie s sho uld b e vie we d as te ntative.
The o rg anizatio n o f the pape r is as fo llo ws. Se c tio n II lays o ut the basic mo de l and Se c tio n III de sc ribe s the data so urc e s. Se c tio n IV re po rts the e mpiric al re sults. Finally, Se c tio n V pro vide s the c o nc lusio ns,
I I . EMPI RI CAL FRAMEWORK AND ESTI MATI ON I SSUES
The re is no t muc h g uidanc e available fro m the o ry re g arding the appro priate spe c ific atio n fo r the po ve rty e quatio n. Ho we ve r, so me re c e nt c ro ss- c o untry e mpiric al wo rks o n po ve rty ( fo r example, Do llar and Kraay 2 0 0 2 and Hasan e t al. 2 0 0 3 ) e mphasize the ro le o f initial c o nditio ns, po lic ie s, and institutio ns in de te rmining inte rc o untry po ve rty pro file s.
Fo llo wing this lite rature, we po stulate a po ve rty e quatio n:
Po ve rty Re duc tio n =
β
1 +β
2 ( Initial Co nditio ns) +β
3( Aid) +β
4 ( Po lic y Variab le s) +β
5 ( Go ve rnanc e Variab le s) +β
5 ( Re g io n Dummie s) +ε
( t)If all rig ht- hand- side ( RHS) variab le s in the po ve rty e quatio n are e xo g e no us, the n we c an e stimate the po ve rty e quatio n inde pe nde ntly fro m a se parate aid e quatio n.9 Ho we ve r, this may
no t be the c ase. Inde e d, it has be e n sug ge ste d in the lite rature that po ve rty and aid te nd to be de te rmine d simultane o usly. While aid may c o ntrib ute to po ve rty re duc tio n, it is c o nte nde d that the re c ipie nt’s po ve rty is an impo rtant c o nside ratio n in aid allo c atio n. In o the r wo rds, aid is g ive n to lo w- inc o me c o untrie s that are manife stly po o r. Sinc e aid allo c atio n is pre sumab ly affe c te d b y re c ipie nt’s ne e ds, whic h are de sc rib e d b y its initial c o nditio ns, co v (aid,
ε
) mig ht no t b e ze ro — that is, aid is e ndo ge no us in the po ve rty e quatio n. To addre ss this issue, we ne e d to instrume nt aid in the analysis. The instrume nt Z sho uld satisfy fo llo wing two c o nditio ns: ( A) co v (Z, aid)≠
0 , and ( B) co v (Z,ε
) =0, i. e. , the instrument sho uld be hig hly c o rre late d with the de pe ndent variable (aid) b ut unc o rre late d with the e rro r.Our se arc h fo r ide al instrume nts ho we ve r has be e n so me what frustrating . Po te ntial c andidate s fo r instruments include po pulatio n, friend o f do no r dummy, arm impo rt ( military impo rtance) , mo rtality rate, and life expe c tanc y, all o f whic h are kno wn to influe nc e the allo c atio n o f aid. That is, the se variables are c o rrelated with aid— in o ther wo rds, they satisfy c o nditio n ( A) . Ho wever, mo st o f these variables also have an impact o n po verty reductio n, thus vio lating co nditio n ( B) . Amo ng the po tential instrume nt variable s ide ntifie d, do no r’s frie nd dummy and arm impo rt are le ss like ly to be c o rre late d with
ε
, the re by making the m plausible instruments. Ho we ve r, in the e stimate d aid re g re ssio n, the se two variables do no t exhibit any sig nificant explanato ry po wer. This, o f co urse, co mplicates o ur effo rts at imple menting Two - Stage - Le ast- Square s ( 2SLS) in the e stimatio n o f the po ve rty e quatio n.Given these diffic ulties in finding the rig ht instrumental variables we c o ntro lled fo r a number o f initial c o nditio ns to he lp c o pe with the e ndo gene ity issue in the po ve rty e quatio n, that is, to re duc e the po ssibility o f co v (aid,
ε
)≠
0. The se initial c o nditio ns, whic h re late to fac to rs that mig ht affe c t the allo c atio n o f aid in o ur re g re ssio ns, inc lude : po ve rty in the be g inning ye ar; lo g o f pe r c apita GDP in the be g inning ye ar; lo g o f po pulatio n in the be g inning ye ar; infant mo rtality rate in the be g inning ye ar; life expe c tanc y in the be g inning ye ar; and the Gini c o e ffic ie nt in the be g inning ye ar. The se initial c o nditio ns he lpe d sig nific antly re duc e the e ndo gene ity pro ble m, but no t to tally. To g uard ag ainst this po ssibility, we c o ntinue to apply e ndo gene ity te sts to o ur e mpiric al re sults.In the analysis, we use as the de pe ndent variable po ve rty re duc tio n, whic h has be e n me asure d
in terms of abso lute, rather than pro po rtio nate rate o f change.10 Since mo st o f co untries have experienced
re duc tio n in po ve rty o ve r time, the c hange in po ve rty [Po ve rt y (t) -Po ve rt y (t- 5) ] is mo stly ne g ative. Fo r e asie r inte rpre tatio n, we use po ve rty re duc tio n as the ne g ative o f abso lute c hange in po ve rty. That is, if the po ve rty le ve l o f c o untry A has falle n fro m 20 to 10 pe rc e nt, the n “c hange in po ve rty” is indic ate d by –10, and po ve rty re duc tio n by +10. In this way, po sitive c o e ffic ient is inte rpre te d as a po sitive e ffe c t o n po ve rty re duc tio n.1 1
9 The aid equatio n is defined as fo llo ws: Aid/GNI = γ
1 +γ2 ( Initial Co nditio ns: Rec ipient’s need) + γ3 ( Po litic al Determinants) +γ3 ( Po lic y Variable s) + γ4 ( Go ve rnanc e Variable s) + νit. The initial c o nditio ns inc lude d in the e quatio n are “ po ve rty in the be g inning ye ar” ; “ lo g o f pe r c apita GDP in the be g inning ye ar” ; “ lo g o f po pulatio n in the be g inning ye ar” ; ” infant mo rtality rate in the beg inning year” ; “ life expec tanc y in the beg inning year” ; and “ the Gini c o effic ient in the beg inning ye ar. ” Po litic al de te rminants inc lude d are “ share o f arm impo rt in to tal impo rt” and “ Franc e zo ne ” , while po lic y and g o ve rnanc e variable s and re g io ns dummie s are the same as tho se fo r the po ve rty e quatio n.
1 0A pro ble m with using the ( annual) pro po rtio nate rate o f c hang e as the inde pe nde nt variable is that it do e s no t pro vide any indic atio n o f the exte nt o f po ve rty reduc tio n, i. e. , it tre ats a reduc tio n in po ve rty fro m 4 to 2 pe rc e nt the same as a reduc tio n fro m 50 to 25 pe rc e nt. Fo r this re aso n, it se e ms that the abso lute c hang e in po ve rty is a be tte r me asure o f po ve rty reduc tio n fo r o ur purpo se.
I I I . DATA
Fo r po ve rty, we use a datase t re c e ntly c o mpile d by Hasan e t al. ( 2003) .1 2 This pane l datase t
c o ve rs mo re than 8 0 c o untrie s o ve r the pe rio d 1 9 6 0 - 1 9 9 8 . Fo r the purpo se o f the pre se nt study, we exc lude all de ve lo pe d c o untrie s and transitio nal c o untrie s. This datase t is, ho we ve r, so me what unb alanc e d due to missing data po ints. The numb e r o f o b se rvatio n pe r c o untry rang e s fro m 1 to 22. Ho we ve r in this study, we to o k o ne o bse rvatio n in e ve ry 5- ye ar pe rio d. This he lps no t o nly to pre ve nt the re sult fro m b e ing do minate d b y fe w c o untrie s, b ut also to smo o th o ut irre g ular ye arly c hang e s. It le ave s 1 4 7 o b se rvatio ns c o ve ring 4 9 c o untrie s.1 3
The e mpiric al analysis in the pape r make s use o f two type s o f variable s, so me o f whic h are time - variant and so me time - invariant. The fo llo wing pro vide s a brie f list o f the princ ipal variable s. The c o mple te list o f the variable s use d in the analysis is g ive n in Table 1.
A.
Ti me Vari ant
( i) Po ve rty: Use d as the de pe nde nt variable, po ve rty is me asure d by the he adc o unt index, whe n the po ve rty line is se t at $ 2 pe r day.1 4
( ii) Aid: The vo lume o f aid is indic ate d b y e ffe c tive de ve lo pme nt assistanc e ( EDA)1 5 as a
pe rc e ntag e o f g ro ss natio nal inc o me ( GNI) , expre sse d as ave rage o f e ac h 5- ye ar pe rio d.
( iii) Ope nne ss: Trade as a pe rc e ntage o f GDP,16 expre sse d as an ave rage o f e ac h 5- ye ar pe rio d.
12 Fo llo wing a me tho d that has no w be c o me the industry standard ( se e fo r e xample , Che n e t al. 2000 and 1994) , Hasan e t al. de rive d po ve rty e stimate s using the fo llo wing info rmatio n: ( i) data distributio n by quintile , ( ii) me an pe r c apita e xpe nditure s, and ( iii) po ve rty line . The y e stimate po ve rty using the alg o rithm and so ftware POVCAL. Sinc e Hasan e t al. use private c o nsumptio n e xpe nditure s ( PCE) pe r c apita fro m natio nal ac c o unts as pro xy fo r me an pe r c apita c o nsumptio n, the ir e stimate s o f po ve rty te nd to b e lo we r whe n c o mpare d to the surve y- b ase d e stimate s o f me an PCE use d by Che n e t al. No te that the se e stimate s by Che n e t al. have be e n the subje c t o f tre me ndo us c o ntro ve rsy in re c e nt ye ars, as the y te nd to o ve re stimate po ve rty ( se e fo r example, Sala- i- Martin 2 0 0 2 ) . Furthe r, sinc e de riving statistically reliable estimates is mo re difficult the clo ser the po verty line is to the lo wer tail o f the expenditure distributio n, Hasan e t al. c o nside r $ 2 a day e stimate s as statistic ally mo re re liab le .
13This c o unts o nly o b se rvatio ns that are use d in the final re g re ssio ns. This datase t is availab le fro m the autho rs o n re q ue st .
14The main re aso n we use the hig he r $ 2 - a- day po ve rty line rathe r than the $ 1 - a- day po ve rty line is that the latte r yie lds fe we r te c hnic ally re liable e stimate s o f po ve rty than the fo rme r. In additio n, the $2 po ve rty line is inc re asing ly be ing use d as the thre sho ld o f c ho ic e in inte rnatio nal disc ussio ns; fo r e xample , the 13th re ple nishme nt o f re so urc e s fo r the Inte rnatio nal De ve lo pme nt Asso c iatio n ( IDA1 3 ) was pre mise d o n suc h a thre sho ld.
15This data se t was c o mpile d by Chang e t al. ( 1998) . Burnside and Do llar we re the first to make use o f this ne w me asure o f effective fo reig n assistance. Ho wever, Chang et al. further manipulate this data to derive real aid ( measured in co nstant 1985 do llars, using the unit value o f impo rts pric e index) and re al e ffe c tive de ve lo pme nt assistanc e ( by dividing re al aid b y re al GDP, using the Pe nn Wo rld tab le s) .
16Trade share s are no t a dire c t me asure o f trade po lic y. Fo r this re aso n, we have also expe rime nte d with a mo re dire c t me asure o f trade po lic y— name ly, impo rt dutie s as a share o f to tal impo rts. Ho we ve r, this me asure pre se nts thre e pro ble ms. First the numbe r o f o bse rvatio ns re duc e s drastic ally by half due to missing data o n impo rt dutie s. Se c o nd, this re late s to a larg e r c o nc e ptual pro b le m: this me asure do e s no t c apture the e ffe c ts o f no ntariff b arrie rs. Third, this me asure unde re stimate s ac tual pro te c tio n whe n hig h tariff rate s drive c o rre spo nding impo rts do wn. Fo r the se re aso ns, we stic k to trad e share s.
TABLE 1
VARI ABLE DEFI NI TI ONAND SOURCE
VARI ABLE DEFI NI TI ON UNI T SOURCE
Po ve rty Pe rc e ntag e o f the po pulatio n who se inc o me falls be lo w Pe rc e nt Hasan e t al. $2 me asure d in purc hasing - po we r parity do llars. ( 2 0 0 3 )
Inc o me Gro ss do me stic pro duc t pe r c apita Re al pe r c apita Pe nn Wo rld GDP at 1996 US Table s do llar purc hasing po we r parity
Gini Co e ffic ie nt A me asure o f the size distrib utio n o f inc o me Gini value Autho rs
o r expe nditure c alc ulatio n
Infant Mo rtality Infant mo rtality rate pe r 1 , 0 0 0 live b irths Numb e r o f Wo rld Bank
Rate infant mo rtality
c ase s
Life Expe c tanc y Life e xpe c tanc y at b irth, to tal Ye ar Wo rld Bank
Aid ( EDA/ GNI) * 100 Pe rc e nt Wo rld Bank
Ope nne ss to Sum o f impo rts and e xpo rts as share o f GDP Pe rc e nt Pe nn Wo rld
Trade Table s
Go ve rnme nt Go ve rnme nt expe nditure s as share o f GDP Pe rc e nt Pe nn Wo rld
Expe nditure s Table s
Inflatio n Rate Pe rc e ntage g ro wth in c o nsume r pric e indic e s Pe rc e nt Pe nn Wo rld
( 100 in 1996) Table s
Quality o f Co mbinatio n o f the fo llo wing go ve rnanc e me asure s: Index numbe r Kauffman e t.
Go ve rnanc e al ( 2003)
Co nt ro l o f Co rrupt io n: Me asure s pe rc e ptio n o f c o rruptio n, c o nve ntio nally de fine d as the exe rc ise o f public po we r fo r private g ain. Go ve rnme nt Ef f e ct ive ne ss: b ase d o n the re spo nse s o n the quality o f public se rvic e pro visio n, quality o f b ure auc rac y, c o mpe te nc e o f c ivil se rvants, inde pe nde nc e o f the c ivil se rvic e fro m po litic al pre ssure s, and c re dib ility o f the g o ve rnme nt’s c o mmitme nt to po lic ie s. Re g ulat o ry Qualit y: Me asure s o f the inc ide nc e o f marke t- unfrie ndly po lic ie s suc h as pric e c o ntro ls o r inade quate b ank supe rvisio n, as we ll as pe rc e ptio ns o f the b urde ns impo se d b y e xc e ssive re g ulatio n in are as suc h as fo re ig n trade and b usine ss de ve lo pme nt. Rule o f Law: Indic ato rs me asuring the e xte nt to whic h ag e nts have c o nfide nc e in and ab ide b y the rule s o f so c ie ty. The se inc lude pe rc e ptio ns o f the inc ide nc e o f c rime , e ffe c tive ne ss and pre dic tab ility o f the jud ic iary, and e nfo rc e ab ility o f c o ntrac ts.
Frie nds o f Franc zo ne dummy 0 , 1 Burnside and
Do no rs Do llar ( 2 0 0 0 )
Military Share o f arm impo rt in to tal impo rt Pe rc e nt Wo rld
Impo rtanc e De ve lo pme nt
17 Whe n the annual inflatio n was le ss than 1 pe rc e nt, it was se t to 1 to pre ve nt it fro m b e ing dro ppe d. Dummy fo r ne g ative inflatio n was inc lude d whe n applic ab le .
18This EDA definitio n o f aid differs fro m the standard definitio n o f aid ado pted by the Organisatio n fo r Eco no mic Co o peratio n and Develo pment ( OECD) . The OECD definitio n inc ludes bo th g rants and c o nc essio nal lo ans net o f repayment o f previo us aid lo ans. This OECD me asure o f aid is c alle d ne t Offic ial De ve lo pme nt Assistanc e ( ODA) , whic h pro vide s a me asure o f ac tual financ ial transfe r to a c o untry. In o the r wo rds, the main diffe re nc e b e twe e n the EDA and the standard me asure ODA is that the fo rme r is the sum o f g rants and g rant e quivale nts o f o ffic ial lo ans and the latte r is the sum o f g rants and lo ans fo r whic h the g rant e le me nt is mo re than 2 5 pe rc e nt.
19 As no te d by Dalg aard and Hanse n ( 2000) , de spite the valuable e ffo rt by Chang e t al. ( 1998) to c o nstruc t an impro ve d me asure o f aid f lo ws, the d if f e re nc e b e twe e n EDA and ODA ap p e ars to b e no mo re than a simp le mathe matic al transfo rmatio n. Mo re o ve r, simple statistic al pro pe rtie s o f diffe re nt aid me asure s sug g e st that the aid e ffe c tive ne ss re sults o btaine d by Burnside and Do llar are no t sig nific antly diffe re nt fro m tho se that use no minal o ffic ial de ve lo pme nt assistanc e .
20 Kaufmann e t al. ( 2003) c autio n, ho we ve r, that de spite the inc re ase in pre c isio n in the late st go ve rnanc e indic ato rs, the marg ins o f e rro r still re main substantial re lative to the units in whic h the se indic ato rs are me asured. Ac c o rding ly, the ranking o f c o untrie s b ase d o n the se ind ic ato rs is sub je c t to sig nific ant marg ins o f e rro r. The marg ins o f e rro r ne e d to be take n se rio usly whe n c lassifying c o untrie s into g ro ups base d o n the ir quality o f g o ve rnanc e , as has be e n pro po se d fo r the ne w aid pro g ram o f the US Go ve rnme nt, the Mille nium Challe ng e Ac c o unt ( MCA) . No te that in Marc h 2002, the US Go ve rnme nt anno unc e d that the MCA wo uld be “ de vo te d to pro je c ts in natio ns that go ve rn justly, inve st in the pe o ple and e nc o urag e e c o no mic fre e do m. ” The pro po se d c rite ria fo r c o untry e lig ib ility unde r the MCA c o ve r vario us g o ve rnanc e me asure s, inc luding five o f the six KKZ me asure s.
( iv) Go ve rnme nt Exp e nd it ure : Go ve rnme nt e xp e nd it ure is p e rc e nt ag e o f g ro ss d o me st ic pro duc t ( GDP) , e xpre sse d as an ave rag e o f e ac h 5 - ye ar pe rio d.
( v ) Inflatio n: lo g ( inflatio n) , e xpre sse d as an ave rag e o f e ac h 5 - ye ar pe rio d.1 7
B.
Ti me I nvari ant
( i) Qualit y o f Go ve rnanc e ind e x: Enc o mp asse s f o ur d ime nsio ns: c o nt ro l o f c o rrup t io n, g o ve rnme nt e ffe c tive ne ss; re g ulato ry quality, and rule o f law
( ii) Re g io n Dummie s: Inc lude s six re g io nal dummie s: EAP: East Asia and Pac ific ; ECA: Euro pe and Ce ntral Asia; LAC: Latin Ame ric a and Caribbe an; MENA: Middle East and No rth Afric a; SA: So uth Asia; and SSA: Sub- Saharan Afric a
We use a new measure o f aid c alled effec tive develo pment assistanc e ( EDA) generated by Chang et al. ( 1998) . The EDA fo cuses o n the o verall grant equivalence o f o fficial financial flo ws and excludes lo an c o mpo ne nt o f c o nc e ssio nal lo ans.18 This ne w me asure is available fo r 133 de ve lo ping c o untrie s
fro m 1975 to 1995. The EDA, as it has been argued, o verco mes so me of the sho rtco mings o f co nventio nal me asure s o f aid [ ODA] b ase d o n the OECD’s Offic ial De ve lo pme nt Assistanc e.1 9
Our data o n g o ve rnanc e — and the inde xe s we use in this pape r to me asure the quality o f go vernanc e— are all derived fro m the dataset repo rted by Kaufmann, Kraay, and Zo ido - Lo bato n ( KKZ) ( 1999a, 1999b, 2002) ; and updated in Kaufmann, Kraay, and Mastruzzi ( 2003) . The KKZ dataset pro vides six go vernance indicato rs, which are : ( i) vo ice and acco untability, ( ii) po litical stability, ( iii) go vernment e f f e c t ive ne ss, ( iv) re g ulat o ry q ualit y, ( v) rule o f law, and ( vi) c o ntro l o f c o rrup t io n.2 0 The se
ind ic ato rs that re late to the p o st- 1 9 9 5 p e rio d in o ur analysis. As it is wid e ly p re sume d that g o ve rnanc e indic ato rs c hange ve ry slo wly o ve r time, we inc lude the 1 9 9 6 g o ve rnanc e indic ato rs ( whic h is c lo se st to o ur pe rio d o f inve stig atio n) in the re g re ssio ns.
Fo r o ur analysis, we have e mplo ye d thre e indexe s o f the quality o f go ve rnanc e. The first two inde xe s o f the g o ve rnanc e quality we use are base d o n all the six g o ve rnanc e indic ato rs o f KKZ. One is the c o mpo site KKZ inde x o f the quality o f g o ve rnanc e use d by Burnside and Do llar ( 2004) and the o ther is an ag g reg ate index that we derived by applying the princ ipal c o mpo nents appro ac h using all six indic ato rs.
Ho we ve r, the final index o f the quality o f go ve rnanc e that we use in this pape r is base d o n fo ur o f the six KKZ go ve rnanc e indic ato rs— namely, c o ntro l o f c o rruptio n, go ve rnme nt e ffe c tive ne ss, re g ulato ry quality, and rule o f law.2 1 This ne w index, whic h re lie s o n the princ ipal c o mpo ne nts
21 In devising this new index, we exc lude o utrig ht vo ic e and ac c o untability and inc lude g o vernment effec tiveness, bec ause whe n we use all six g o ve rnanc e indic ato rs as se parate explanato ry variab le s ( se e e quatio n 2 in Tab le 3 ) , we find that vo ic e and ac c o untab ility has a ne g ative sig nific ant c o e ffic ie nt, while g o ve rnme nt e ffe c tive ne ss has a po sitive sig nific ant c o e ffic ie nt. Ne xt, we e xpe rime nt with vario us amalg ams that c o mbine g o ve rnme nt e ffe c tive ne ss with the re maining fo ur g o ve rnanc e indic ato rs ( i. e . , an ag g re g atio n o f fo ur to five indic ato rs to c apture as muc h g o ve rnanc e indic ato rs as po ssible ) . The c o mbinatio n o f five indic ato rs witho ut vo ic e and ac c o untability pro ve s to be insig nific ant, while the c o mbinatio n o f fo ur indic ato rs— name ly, c o ntro l o f c o rruptio n, g o ve rnme nt e ffe c tive ne ss, re g ulato ry quality, and rule o f law— is fo und to b e a sig nific ant pre dic to r o f po ve rty re duc tio n.
TABLE 2
SUMMARY STATI STI CS ( MEAN VARI ABLES) BY REGI ON
REGI ON EAP ECA LAC MENA SA SSA TOTAL
Po ve rty 3 2 . 7 6 9 . 0 5 1 9 . 9 6 2 0 . 1 6 5 9 . 2 4 6 6 . 4 6 3 6 . 6 9
Chang e in Po ve rty 9 . 7 3 3 . 6 7 1. 34 - 1. 11 6. 94 - 1. 58 2. 86
Pe r Capita Inc o me 2 , 9 4 7 4 , 9 3 7 4 , 5 0 1 3 , 7 6 6 1 , 3 9 2 1 , 2 6 9 3 , 1 2 6 Lo g ( Pe r c apita inc o me ) 7 . 9 9 8 . 5 0 8 . 4 1 8 . 2 3 7 . 2 4 7 . 1 5 7 . 9 1 Po pulatio n ( 106) 6 8 . 4 1 4 5 . 2 2 7 . 0 4 7 . 9 0 7 2 . 3 6 1 0 . 0 8 2 8 . 0 7
Po pulatio n ( lo g ) 18. 04 1 7 . 6 3 1 5 . 7 7 1 5 . 8 8 1 8 . 1 0 1 6 . 1 3 1 6 . 6 0 Gini Co e ffic ie nt 36. 65 4 2 . 5 7 4 5 . 1 2 4 2 . 2 0 3 2 . 7 5 4 4 . 1 3 4 1 . 5 7 Infant Mo rtality Rate 1 8 . 0 4 1 7 . 6 3 1 5 . 7 7 1 5 . 8 8 1 8 . 1 0 1 6 . 1 3 1 6 . 6 0 Life Expe c tanc y 6 4 . 1 1 6 1 . 6 2 6 5 . 1 4 6 2 . 4 8 5 5 . 9 5 4 6 . 7 3 5 9 . 7 2
Aid 0 . 5 3 0 . 3 2 1 . 8 6 3 . 5 8 3 . 9 4 6 . 8 9 2 . 9 9
Op e nne ss 6 2 . 7 8 2 4 . 2 8 6 0 . 1 8 7 8 . 0 2 3 3 . 0 1 5 1 . 6 0 5 5 . 1 7 Go ve rnme nt
Expe nditure 1 9 . 2 9 1 5 . 7 4 2 1 . 5 9 2 8 . 0 0 1 9 . 4 4 2 0 . 9 6 2 0 . 9 7
Inflatio n 8 . 2 1 4 2 . 0 4 2 5 . 9 3 8 . 4 8 9 . 4 1 1 3 . 7 8 1 7 . 6 8
Inflatio n ( lo g ) 2. 11 3. 74 3 . 2 6 2 . 1 4 2 . 2 4 2 . 6 2 2 . 7 5
Quality o f
Go ve rnanc e 1 . 2 6 0 . 9 6 0 . 2 4 0 . 1 8 - 0 . 6 9 - 1 . 6 0 - 0 . 0 7
Co untrie s 7 1 1 8 5 5 1 3 4 9
Ob se rvatio ns 2 5 4 6 0 8 2 0 3 0 1 4 7
EAP: East Asia and the Pac ific ; ECA: Euro pe and Ce ntral Asia; LAC: Latin Ame ric a and Caribbe an; MENA: Middle East and No rth Afric a; SA: So uth Asia; SSA: Sub - Saharan Afric a.
appro ac h, c o nde nse s the info rmatio n c o ntaine d in the fo ur g o ve rnanc e indic ato rs into a sing le me asure. This ne w me asure, whic h re tains the c harac te r and nature o f the o rig inal indic ato rs, he lps to atte nuate the pro b le ms asso c iate d with hig h c o rre latio ns amo ng the g o ve rnanc e indic ato rs. We use the re sults o f the first princ ipal c o mpo nent, be c ause the first princ ipal c o mpo nent ac c o unts fo r abo ut 80 pe rc e nt o f the to tal po pulatio n varianc e, indic ating that this c o mpo nent c an re plac e the o rig inal indic ato rs witho ut muc h lo ss o f info rmatio n.2 2
I V. EMPI RI CAL
ANALYSI S
This se c tio n re po rts the re sults o f nine e quatio ns2 3 that fall into two c ate g o rie s, tho se with
and witho ut inte rac tio ns. The y are liste d as fo llo ws:
A.
Equat i ons 1 t o 4 : Wi t hout I nt eract i ons
( 1 ) Po ve rty re duc tio n = f ( initial c o nditio ns, mac ro e c o no mic po lic y variab le s)
( 2 ) Po ve rty re duc tio n = f ( initial c o nd itio ns, g o ve rnanc e me asure s)
( 3 ) Equatio n ( 1 ) + aid + aid- square d + quality o f g o ve rnanc e
( 4 ) Equatio n ( 3 ) + re g io n fixe d- e ffe c ts
B.
Equat i ons 5 t o 9 : Wi t h I nt eract i ons
( 5) Equatio n ( 3) + aid- go ve rnanc e inte rac tio n
( 6) Equatio n ( 3) + aid- po lic y inte rac tio n
( 7) Equatio n ( 4) + aid- go ve rnanc e inte rac tio n
( 8) Equatio n ( 4) + aid- po lic y inte rac tio n
( 9) Equatio n ( 4) + aid- re g io n inte rac tio n
Equatio n 1 is the base regressio n, which is used to determine whether it is appro priate to co nstruct a po lic y index o ut o f the thre e mac ro e c o no mic po lic y variable s, fo llo wing the appro ac h o f Burnside and Do llar. We, ho we ve r, abando n this plan to c o nstruc t suc h a po lic y index sinc e no t all o ur po lic y variab le s are sig nific ant: o ne o f the po lic y variab le s ( o pe nne ss) turns o ut to b e insig nific ant in the re g re ssio n ( Tab le 3 ) .
22 No te that the first princ ipal c o mpo ne nt attac he s almo st e qual impo rtanc e to e ac h o f the fo ur g o ve rnanc e indic ato rs, as the c o rre latio n b e twe e n the m and the first princ ipal c o mpo ne nt rang e s fro m 0 . 8 6 to 0 9 3 .
TABLE 3
BASE REGRESSI ONS
( 1 ) I NI TI AL CONDI TI ONS AND ( 2 ) I NI TI AL CONDI TI ONS AND MACROECONOMI C POLI CY GOVERNANCE
Init ial Co ndit io ns:
Po ve rty 0 . 3 2 6 * * * 0 . 3 7 3 * * *
( 4 . 4 7 ) ( 4 . 8 2 )
Pe r Capita GDP 8 . 4 2 5 * * * 9 . 4 5 3 * * *
( 2 . 8 4 ) ( 3 . 1 2 )
Po pulatio n 1 . 5 1 0 * * * - 0 . 3 1 9
( 2 . 6 9 ) ( 0 . 6 1 )
Infant Mo rtality Rate 0 . 0 8 2 * 0 . 0 7 1 *
( 1 . 9 6 ) ( 1 . 7 7 )
Life Expe c tanc y 0 . 6 7 8 * * * 0 . 5 5 2 * * *
( 3.35) ( 2.66)
Gini Co e ffic ie nt 0. 084 - 0. 001
( 0.94) ( 0.01)
Ma c ro e c o no m ic Po lic y :
Ope nne ss 0 . 0 5 0
( 1 . 5 8 ) Go ve rnme nt Expe nditure - 0 . 2 6 7 * * *
( 3 . 0 5 )
Inflatio n - 1 . 0 6 6 *
( 1 . 9 1 )
Go ve rnance :
Vo ic e and Ac c o untability - 4 . 5 4 1 * * *
( 2 . 6 5 )
Po litic al Stability - 1. 487
( 1 . 0 8 )
Go ve rnme nt Effe c tive ne ss 5 . 6 3 2 *
( 1 . 9 3 )
Re g ulato ry Quality 2. 043
( 0 . 8 4 )
Rule o f Law 1 . 5 3 1
( 0 . 5 9 )
Co ntro l o f Co rruptio n 0 . 5 0 2
( 0 . 2 6 )
Ob se rvatio ns 2 1 3 2 0 8
R- square d 0 . 2 4 0 . 2 6
* me ans sig nif ic ant at the 1 0 % le ve l * * me ans sig nif ic ant at the 5 % le ve l * * * me ans sig nif ic ant at the 1 % le ve l
SECTI ON I V EMPI RI CAL ANALYSI S
In e quatio n 2, all six go ve rnanc e me asure s are e nte re d se parate ly in the re g re ssio n. We find vo ic e and ac c o untability to have a sig nific ant but ne g ative c o e ffic ie nt ( whic h is unexpe c te d, with a wro ng sig n) , go ve rnment e ffe c tive ne ss is po sitive and sig nific ant, and all o the r me asure s are no t
sig nific ant. Apprehending that this re sult may simply be an artifac t o f the hig h c o rre latio n amo ng the go vernance measures, we go o n to co nstruct an index co mbining the different go vernance measures that he lps e liminate this hig h c o rre latio n ( se e Se c tio n III o n data) .
The aid- po verty reg ressio ns beg in with equatio ns 3 and 4, where bo th OLS and 2SLS are applied. We instrument fo r aid with “ Franc zo ne dummy” and “ Share o f arm impo rt in to tal impo rt. ” To te st the e ndo ge ne ity o f aid with o r witho ut quality o f go ve rnanc e, the Hausman te st was applie d fo r OLS and 2SLS e stimate s. The e stimate d Hausman te st statistic s sug g e st that the aid variable c an be safe ly re g arde d as e xo g e no us thro ug ho ut all o ur spe c ific atio ns. Thus, o nly the OLS is use d in the suc c e e ding e quatio ns.
1 .
How Does Ai d Af f ect Povert y Reduct i on?
To answe r this que stio n, we lo o k at the re g re ssio ns witho ut inte rac tio ns ( e quatio ns 3 and 4 in Table 4) and with inte rac tio ns ( e quatio ns 5 to 9 in Table 5) . All the e quatio ns also inc lude the aid-squared term. The effect o f aid o n po verty reductio n is estimated by co ntro lling fo r initial co nditio ns, mac ro e c o no mic po lic y, and quality o f go ve rnanc e. In e quatio n 3, we intro duc e g o ve rnanc e quality to e quatio n 1, while in e quatio n 4 we add the re g io n fixe d- e ffe c ts to e quatio n 3.
In equatio ns 3 and 4, the estimated c o effic ients o f aid are c o nsistently statistic ally sig nific ant sug g e sting that the re is a syste matic impac t o f aid o n po ve rty re duc tio n. Eve n if we inc lude the inte rac tio n o f aid with g o ve rnanc e as a c o ntro l variable to e quatio n 3 ( e quatio n 5) o r to e quatio n 4 ( e quatio n 7) we still find that aid has a sig nific ant and po sitive impac t o n po ve rty re duc tio n. Whe n we inc lude the inte rac tio n o f aid with mac ro e c o no mic po lic y to e quatio n 3 ( e quatio n 6) o r inte rac tio n o f aid with re g io ns to e quatio n 4 ( e quatio n 9) , we find that aid is no t sig nific ant. But whe n re g io n- fixe d e ffe c ts are adde d alo ng with aid– mac ro e c o no mic po lic y inte rac tio ns, re sults sho w that aid is a sig nific ant pre dic to r o f po ve rty re duc tio n ( e quatio n 8) . The c o e ffic ie nts indic ate that fo r every 1 perc ent inc rease in EDA as share o f GNI, po verty inc idenc e dro ps by 1.2–1.6 perc ent.
2 .
Does Ai d Ef f ect i veness Depend on t he Si ze of Ai d?
To addre ss this que stio n, we examine the c o e ffic ient o f the aid- square d te rm in the e quatio ns. The impac t o f aid o n po ve rty re duc tio n may no t b e c o nstant, b ut varie s with the size o f aid. To inc o rpo rate this no nline ar re latio nship b e twe e n aid and po ve rty re duc tio n, a quadratic te rm o f aid is intro duc e d in the re g re ssio n.
TABLE 4
WI THOUT INTERACTI ONS: AI D- POVERTY REGRESSI ONS
AI D- POVERTY REGRESSI ONS
( 3 ) WI THOUT REGI ONS ( 4 ) WI TH REGI ONS
OLS 2 SLS OLS 2 SLS
Init ial Co ndit io ns:
Po ve rty 0 . 4 8 3 * * * 0 . 4 9 9 * * * 0 . 5 0 9 * * * 0 . 5 2 3 * * *
( 5 . 5 1 ) ( 5 . 0 6 ) ( 5 . 6 9 ) ( 5 . 5 9 ) Pe r Capita GDP 1 2 . 9 9 0 * * * 1 4 . 7 1 9 * * 1 3 . 1 2 3 * * * 1 4 . 8 8 3 * * *
( 3 . 5 4 ) ( 2 . 4 6 ) ( 3 . 5 6 ) ( 3 . 1 9 )
Po pulatio n 2 . 3 0 8 * * * 2 . 7 7 1 * 1 . 5 4 2 * 2 . 2 5 9
( 3 . 2 3 ) ( 1 . 9 1 ) ( 1 . 7 3 ) ( 1 . 5 5 ) Infant Mo rtality Rate 0 . 1 3 0 * * * 0 . 1 3 3 * * * 0 . 1 2 0 * 0 . 1 3 2 * *
( 2 . 6 7 ) ( 2 . 6 7 ) ( 1 . 9 3 ) ( 2 . 0 0 ) Life Expe c tanc y 0 . 8 2 5 * * * 0 . 8 4 4 * * * 0 . 6 8 1 * * 0 . 7 1 7 * *
( 3.48) ( 3.45) ( 2.13) ( 2.18)
Gini Co e ffic ie nt - 0. 025 - 0. 012 - 0. 022 - 0. 017
( 0.24) ( 0.10) ( 0.20) ( 0.15)
Ma c ro e c o no m ic Po lic y :
Ope nne ss 0 . 0 9 5 * * 0 . 1 0 3 * * 0 . 0 6 7 * 0 . 0 7 8 *
( 2 . 4 6 ) ( 2 . 3 2 ) ( 1 . 6 6 ) ( 1 . 7 6 ) Go v’t Expe nditure - 0 . 3 9 8 * * * - 0 . 4 1 7 * * * - 0 . 4 1 5 * * * - 0 . 4 3 9 * * *
( 3 . 8 3 ) ( 3 . 5 8 ) ( 3 . 7 7 ) ( 3 . 7 2 )
Inflatio n - 0 . 1 2 2 - 0 . 0 4 7 0 . 0 8 8 0 . 0 7 9
( 0 . 1 9 ) ( 0 . 0 7 ) ( 0 . 1 3 ) ( 0 . 1 1 )
Go ve rnance :
Qualit y o f Go ve rnance 1 . 0 1 1 * 1 . 0 2 6 * 0 . 6 5 8 0 . 7 0 8
( 1 . 9 6 ) ( 1 . 9 7 ) ( 1 . 1 5 ) ( 1 . 2 1 )
Aid 1 . 1 8 5 * * 1 . 9 4 5 1 . 5 7 4 * * * 2 . 6 3 3
( 2 . 2 0 ) ( 0 . 9 1 ) ( 2 . 8 4 ) ( 1 . 4 8 )
Aid-square d - 0 . 0 7 9 * * - 0 . 1 1 8 - 0 . 0 9 3 * * * - 0 . 1 4 7
( 2 . 6 1 ) ( 1 . 0 8 ) ( 3 . 0 2 ) ( 1 . 6 2 )
Re gio ns:
EAP 4 . 7 6 7 4 . 4 3 6
( 1 . 3 9 ) ( 1 . 2 7 )
ECA 0 . 6 3 8 - 0 . 0 1 7
( 0 . 1 4 ) ( 0 . 0 0 )
MENA - 0 . 2 0 2 - 1 . 3 4 9
( 0 . 0 6 ) ( 0 . 3 6 )
SA - 3 . 0 6 9 - 4 . 9 1 4
( 0 . 8 5 ) ( 1 . 0 5 )
SSA - 6 . 6 2 5 * - 7 . 5 1 1 * *
( 1 . 9 3 ) ( 2 . 0 0 )
Ob se rvatio ns 1 4 7 1 4 7 1 4 7 1 4 7
R- square d 0 . 3 9 0 . 3 8 0 . 4 5 0 . 4 3
* me ans sig nif ic ant at the 1 0 % le ve l * * me ans sig nif ic ant at the 5 % le ve l * * * me ans sig nif ic ant at the 1 % le ve l
EAP: East Asia and Pac ific ; ECA: Euro pe and Ce ntral Asia; LAC: Latin Ame ric a and Caribbe an; MENA: Middle East and No rth Afric a; SA: So uth Asia; SSA: Sub - Saharan Afric a.
No t e : Po ve rty re duc tio n= [po v(t) -po v(t- 5 ) ] . Ab so lute value o f t statistic s in pare nthe se s. Fo r e quatio n 3 ( 2 SLS) , Endo g e ne ity te st re sult is: χ2( 1 3 ) = 0 . 1 3 with p=1 . 0 0 ; Ove ride ntific atio n te st re sult is: χ2( 1 ) =1 . 3 9 5 with p=. 2 3 7 6 . Fo r e quatio n 4 ( 2 sls) , Endo g e ne ity
value.2 4 In o the r wo rds, the re are diminishing marg inal re turns to aid. The e quatio ns with
aid-square d sho w that aid has a po sitive e ffe c t o n po ve rty re duc tio n whe n aid ( EDA) is le ss than abo ut 17 pe rc e nt o f GNI but be c o me s ine ffe c tive the re afte r.2 5 In te rms o f ODA, this wo uld translate to
ab o ut 2 6 pe rc e nt o f GNI.2 6
3 .
To What Ext ent i s Ai d Ef f ect i veness Cont i ngent
on ( Macroeconomi c) Poli cy?
Sinc e the public atio n o f the hig hly influe ntial study by Burnside and Do llar ( 2000) , it is no w wide ly ac c e p t e d in t he p o lic y c irc le t hat aid e f f e c t ive ne ss is c rit ic ally c o nt ing e nt o n “ g o o d ” mac ro e c o no mic po lic y. The ro bustne ss o f this pro po sitio n is explo re d in the pre se nt pape r by adding inte rac tio n te rms be twe e n aid and e ac h individual c o mpo ne nt o f mac ro e c o no mic po lic y. Ho we ve r, unlike Burnside and Do llar, we find in the re g re ssio ns with the inte rac tio n te rms be twe e n aid and macro eco no mic po licy variables ( equatio n 6) , the co efficients o f all interactio n terms are no t significant, sug ge sting that aid e ffe c tive ne ss is no t c o ntingent upo n the state o f the mac ro e c o no mic po lic y.2 7
Inte re sting ly, e ve n if we inc lude re g io n fixe d- e ffe c ts in the re g re ssio n ( e quatio n 8) , all inte rac tio ns o f aid with mac ro e c o no mic po lic y still have ze ro c o e ffic ients.
To avo id c o n f usio n , it may b e no t e d t h at t he ab o ve re sult d o e s no t me an t h at so und mac ro e c o no mic p o lic y is un imp o rt ant f o r p o ve rt y re duc t io n . On t he c o nt rary, as o ur vario us re g re ssio ns sug g e st, mac ro e c o no mic po lic y c an have a sig nific ant b e aring o n po ve rty re duc tio n. Ho we ve r, what the abo ve sug ge sts is that this impac t is no t me diate d thro ug h its inte rac tio n with aid. In o the r wo rds, aid e ffe c tive ne ss in re duc ing po ve rty is no t c o nting e nt o n the state o f the mac ro e c o no mic po lic y, as has be e n c laime d. To wit, e c o no mic aid has o n ave rage be e n suc c e ssful unde r a wide varie ty o f mac ro e c o no mic e nviro nme nts in re duc ing p o ve rty. Similar re sults— o f unc o nditio nal aid- e ffe c tive ne ss— have b e e n re po rte d amo ng o the rs b y Hanse n and Tarp ( 2 0 0 0 ) and Dalg aard e t al. ( 2004) , tho ug h the y have use d diffe rent e mpiric al frame wo rks and, o f c o urse, a diffe re nt me tric fo r me asuring aid e ffe c tive ne ss— i. e. , e c o no mic g ro wth.
4 .
What i s t he Role of Quali t y of Governance i n Povert y Reduct i on?
To addre ss this que stio n, we have fo llo we d two diffe re nt appro ac he s. First, we expe rime nt with two diffe re nt ag g re g ate indic ato rs o f go ve rnanc e that use all the six go ve rnanc e indic ato rs o f KKZ. One is the KKZ inde x use d b y Burnside and Do llar ( 2 0 0 4 ) and the o the r is a de rive d inde x that SECTI ON I V EMPI RI CAL ANALYSI S
24 Given the explo rato ry nature o f the present exercise, we sho uld no t attach to o much impo rtance to the exact identificatio n o f the e mpiric al turning po int. Fo r a disc ussio n o f the e mpiric al turning po ints in the c o nte xt o f g ro wth studie s, se e Le nsink and White ( 2001) .
25A similar re sult, in the c o nte xt o f g ro wth re g re ssio ns, was o b taine d b y Hadjimic hae l e t al. ( 1 9 9 5 ) , Durb arry e t al. ( 1998) , and Le nsink and White ( 1999) .
26 Fo r o ur sample c o untrie s, EDA amo unts to o nly ab o ut 6 6 pe rc e nt o f ODA. This wo uld, in o the r wo rds, imply that ODA is e ffe c tive in re duc ing po ve rty o nly up to abo ut 26 pe rc e nt o f GNI. This pe rc e ntag e is c lo se , tho ug h no t ide ntic al, to that o b taine d using Chang ’s ( 1 9 9 8 ) e stimate . Ac c o rding to Chang , ne t ODA o ve rstate s aid flo ws b y as muc h as 2 5 - 3 0 pe rc e nt. In this c ase , the c o rre spo nding turning po int is 2 2 pe rc e nt o f GNI.
TABLE 5
WI THI NTERACTI ONS: AI D– POVERTY REGRESSI ONS
( 5 ) WI TH AI D– ( 6 ) WI TH AI D– ( 7 ) WI TH AI D– GOVERNANCE POLI CY GOVERNANCE I NTERACTI ON I NTERACTI ON I NTERACTI ON +
REGI ON
COEFFI CI ENT T-STAT COEFFI CI ENT T-STAT COEFFI CI ENT T-STAT
Init ial Co ndit io ns:
Po verty 0 . 4 7 4 * * * 5 . 1 7 0 . 4 8 3 * * * 5 . 3 5 0 . 5 1 0 * * * 5 . 4 8 Pe r Capita GDP 1 2 . 7 0 6 * * * 3 . 3 7 1 3 . 7 6 0 * * * 3 . 6 7 1 3 . 1 8 3 * * * 3 . 4 7 Po pulatio n 2 . 3 1 9 * * * 3 . 2 3 2 . 4 3 6 * * * 3 . 3 2 1 . 5 3 7 * 1 . 7 1 Infant Mo rtality Rate 0 . 1 3 0 * * * 2 . 6 6 0 . 1 2 7 * * 2 . 5 8 0 . 1 2 1 * 1 . 9 1 Life Expe c tanc y 0 . 8 3 0 * * * 3 . 4 9 0 . 8 1 8 * * * 3 . 4 1 0 . 6 8 3 * * 2 . 1 1
Gini Co e ffic ie nt - 0. 028 0. 26 - 0. 002 0. 02 - 0. 022 0. 20
Ma c ro e c o no m ic Po lic y
Op e nne ss 0 . 0 9 8 * * 2 . 4 8 0 . 0 8 7 * 1 . 9 8 0 . 0 6 7 1 . 6 0
Go ve rnme nt Expe nditure - 0 . 3 9 3 * * * 3 . 7 3 - 0 . 3 2 4 * * 2 . 1 8 - 0 . 4 1 5 * * * 3 . 7 4
Inflatio n - 0. 109 0. 17 - 0. 911 1 . 1 2 0 . 0 8 5 0 . 1 2
Qualit y o f Go ve rnance 1 . 0 4 0 * * 1 . 9 9 0 . 9 1 0 * 1 . 7 2 0 . 6 4 9 1 . 1 0
Aid 1 . 1 5 1 * * 2 . 1 0 1 . 0 5 1 1 . 5 2 1 . 5 8 4 * * * 2 . 7 6
Aid-sq uare d - 0 . 0 8 1 * * * 2 . 6 3 - 0 . 1 0 7 * * 2 . 5 8 - 0 . 0 9 3 * * * 3 . 0 1
Re gio ns
EAP 4 . 8 0 9 1 . 3 8
ECA 0 . 6 2 6 0 . 1 4
MENA - 0. 214 0. 07
SA - 3. 079 0. 85
SSA - 6. 595* 1 . 9 0
Int e ract io ns
Aid x Go ve rnanc e - 0. 055 0. 35 0 . 0 1 1 0 . 0 7
Aid x Ope nne ss 0 . 0 0 1 0 . 2 6
Aid x Go ve rnme nt
Expe nditure - 0. 015 0. 62
Aid x Inflatio n 0. 254 1. 58
Aid x EAP Aid x ECA Aid x MENA Aid x SA Aid x SSA
Ob se rvatio ns 147 147 147
R- square d 0 . 3 9 0 . 4 0 0 . 4 5
* me ans sig nif ic ant at the 1 0 % le ve l * * me ans sig nif ic ant at the 5 % le ve l * * * me ans sig nif ic ant at the 1 % le ve l
EAP: East Asia and Pac ific ; ECA: Euro pe and Ce ntral Asia; LAC: Latin Ame ric a and Carib b e an; MENA: Middle East and No rth Afric a; SA: So uth Asia; SSA: Sub - Saharan Afric a.
No t e : Po ve rty re duc tio n= [po v(t) -po v(t- 5 ) ] .
SECTI ON I V EMPI RI CAL ANALYSI S
TABLE 5 (CONT’D. )
( 8 ) WI TH AI D– ( 9 ) WI TH REGI ON + POLI CY I NTERACTI ON + AI D– REGI ON
REGI ON I NTERACTI ON
COEFFI CI ENT T-STAT COEFFI CI ENT T-STAT
Init ial Co ndit io ns
Po verty 0 . 5 1 1 * * * 5 . 5 4 0 . 4 8 1 * * * 5 . 4 4
Pe r Capita GDP 1 3 . 6 1 2 * * * 3 . 6 0 1 3 . 1 1 0 * * * 3 . 5 4
Po pulatio n 1. 687* 1. 78 2. 078* * 2. 25
Infant Mo rtality Rate 0 . 1 1 7 * 1 . 8 4 0 . 1 1 8 * 1 . 8 4
Life Expe c tanc y 0 . 6 7 7 * * 2 . 0 8 0 . 5 2 3 1 . 6 1
Gini Co e ffic ie nt - 0. 011 0. 10 - 0. 074 0. 69
Ma c ro e c o no m ic Po lic y
Op e nne ss 0 . 0 6 4 1 . 3 7 0 . 1 0 0 * * 2 . 3 9
Go ve rnme nt Expe nditure - 0 . 3 5 5 * * 2 . 3 7 - 0 . 3 7 4 * * * 3 . 2 6
Inflatio n - 0. 479 0. 55 - 0. 322 0 . 4 6
Qualit y o f Go ve rnance 0 . 6 1 2 1 . 0 4 0 . 9 5 2 * 1 . 6 7
Aid 1 . 5 1 2 * * 2 . 1 6 0 . 7 5 9 1 . 1 1
Aid-sq uare d - 0 . 1 0 9 * * 2 . 5 9 - 0 . 0 7 3 * * 2 . 3 1
Re g io ns:
EAP 4 . 3 1 1 1 . 1 9 - 3. 164 0. 81
ECA 1 . 1 4 1 0 . 2 4 2 . 7 7 1 0 . 3 2
MENA 0 . 3 0 9 0. 09 - 0. 224 0 . 0 5
SA - 3. 283 0. 88 - 8. 119 1. 55
SSA - 6. 378* 1 . 7 8 - 1 0 . 6 7 5 * * 2 . 5 2
I nt e ract io ns:
Aid x Go ve rnanc e
Aid x Ope nne ss 0 . 0 0 1 0 . 1 5
Aid x Go ve rnme nt
Expe nditure - 0. 014 0. 56
Aid x Inflatio n 0. 180 1. 10
Aid x EAP 9 . 0 6 9 * * * 3 . 1 9
Aid x ECA - 11. 420 0 . 5 0
Aid x MENA - 0. 191 0. 21
Aid x SA 1 . 3 3 6 1 . 4 4
Aid x SSA 0 . 8 7 0 * 1 . 8 7
Ob se rvatio ns 147 147
R- square d 0 . 4 5 0 . 5 1
* me ans sig nif ic ant at the 1 0 % le ve l * * me ans sig nif ic ant at the 5 % le ve l * * * me ans sig nif ic ant at the 1 % le ve l
we c o nstruc t ap p lying the p rinc ip al c o mp o ne nts ap p ro ac h using the same six ind ic ato rs. Our re g re ssio ns base d o n the se two ag g re g ate indic e s o f g o ve rnanc e sug g e st no sig nific ant re latio nship be twe e n po ve rty re duc tio n and go ve rnanc e.28 Se c o nd, we fo llo w a disag g re g ate appro ac h that use s
all six g o ve rnanc e indic ato rs2 9 as e xplanato ry variable s o f po ve rty re duc tio n. The re sults fro m this
experiment sho w that o nly g o vernment effectiveness has a po sitive and sig nificant impact o n po verty re duc tio n. Vo ic e and ac c o untability has a sig nific ant, but unexpe c te d ne g ative, c o e ffic ient,3 0 while
the re maining c o e ffic ie nts o f the o the r fo ur g o ve rnanc e indic ato rs are no t sig nific antly diffe re nt f ro m ze ro .
Ho we ve r, the pic ture c hange s whe n we take a mo re se le ct ive appro ac h as de sc ribe d in Se c tio n III, i. e. , whe n we c o nstruc t a ne w index o f go ve rnanc e quality c o mbining o nly fo ur3 1 o f KKZ’s six
indic ato rs. Applying this ne w quality o f g o ve rnanc e index, we find that it has po sitive c o e ffic ients in fo ur equatio ns ( equatio ns 3, 5, 6, and 9) , sho wing a sig nificant impact o f the quality o f go vernance o n po ve rty re duc tio n. Whe n re g io nal fixe d e ffe c ts are inc lude d ( e quatio ns 4, 7, and 8) the quality o f go ve rnanc e index still has po sitive impac t o n po ve rty re duc tio n, altho ug h the c o e ffic ients are no t statistic ally sig nific ant. This re sult, to ge the r with the re sults o f the pre vio us atte mpt using all six go vernanc e indic ato rs, also sug gests that while go vernanc e may be impo rtant, no t all dimensio ns o f go vernance are equally impo rtant fo r po verty reductio n fo r co untries at vario us stages o f develo pment.
Co ntro lling fo r o ther fac to rs, a 1 po int inc rease in the quality o f g o vernanc e index is asso c iated with ro ug hly a 1 pe rc e ntage po int re duc tio n in po ve rty ( e quatio ns 3, 5, 6, and 9) . A c o untry that is able to imple ment c e rtain ke y me asure s re lating to the o ve rall quality o f the bure auc rac y ( i. e. , c o ntro l o f c o rruptio n, go vernment effec tiveness, reg ulato ry quality, and rule o f law) is therefo re likely to expe rienc e faste r po ve rty re duc tio n.
5 .
To What Ext ent i s Ai d Ef f ect i veness Cont i ngent on Quali t y
of Governance?
Two e quatio ns are e stimate d to examine this que stio n ( Table 5) . Equatio ns 5 and 7 sho w the interac tio ns o f aid with the quality o f go vernanc e, with and witho ut reg io n fixed- effec ts, respec tively. The re sults sho w that inte rac tio ns o f aid with quality o f go ve rnanc e are no t sig nific antly diffe re nt f ro m ze ro , sug g e st in g t h at t h e imp ac t o f aid ( if an y) is n o t c o n t in g e n t o n t h e q ualit y o f g o ve rnanc e — tho ug h the quality o f g o ve rnanc e has a sig nific ant b e aring o n po ve rty re duc tio n.
6 .
To What Ext ent Does Ai d Ef f ect i veness Vary wi t h Regi on?
Altho ug h aid by itse lf do e s no t appe ar to sig nific antly affe c t po ve rty re duc tio n in e quatio n 9 ( Table 5) , two o f its interactio n terms with regio n fixed- effects are statistically significant. Aid appears to exert a po sitive impac t o n po verty reduc tio n in East Asia and Pac ific ( EAP) and Sub- Saharan Afric a,
28 Availab le upo n re que st fro m the autho rs.
29 It may be recalled that these indicato rs are: ( i) vo ice and acco untability, ( ii) po litical stability, ( iii) go vernment effectiveness, ( iv) re g ulato ry quality, ( v) rule o f law, and ( vi) c o ntro l o f c o rruptio n.
3 0 Availab le upo n re que st fro m the autho rs.
b ut the stro nge r impac t se e ms to b e in EAP. This se e ms to sug ge st two thing s: that aid is mo re e ffe c tive in EAP; and that EAP has ac hie ve d faste r pro g re ss in po ve rty re duc tio n than c o untrie s in o the r re g io ns e ve n afte r c o ntro lling fo r diffe re nc e s in the amo unt o f aid and po lic ie s.3 2
7 .
How Does Macroeconomi c Poli cy
33I mpact on Povert y Reduct i on?
This questio n is examined by estimating regressio ns with and witho ut co ntro lling fo r interactio ns ( equatio ns 1 to 9) . The estimated co efficient o f o penness is po sitive and sig nificant at the 10 percent le ve l ( e quatio ns 3 to 6 and 9 ) .3 4 It sug g e sts that mo re o pe nne ss— in the fo rm o f g re ate r share
o f trade in GDP3 5— he lps ac c e le rate po ve rty re duc tio n. In e quatio n 3 whe re we c o ntro l fo r a who le
ho st o f initial c o nditio ns and inc lude mac ro e c o no mic po lic y variab le s, the e stimate d c o e ffic ie nt o f o pe nne ss sug g e sts that a 1 0 pe rc e ntag e po int impro ve me nt in the o pe nne ss indic ato r le ads to a 0 . 9 5 - 1 pe rc e ntag e po int re duc tio n in po ve rty in e ac h pe rio d. The pre se nt e xe rc ise inc lude s a sample o f c o untrie s with diffe re nt de g re e s o f o pe nne ss. The c o untry that e xhib its the lo we st indic ato r o f o pe nne ss c arrie s a value o f 13 pe rc e nt while the c o untry that e xhibits the maximum o pe nne ss c arrie s a value o f 163 pe rc e nt. Our e stimate sug g e sts that po ve rty re duc tio n in the mo st o pe n c o untry wo uld b e 1 5 pe rc e ntag e po ints hig he r c o mpare d to the le ast o pe n c o untry ( if all o the r c o nditio ns are the same ) . But this e ffe c t disappe ars o nc e inte rac tio n te rms are intro duc e d— that is, interactio n o f aid with g o vernance o r interactio ns o f aid with macro eco no mic po licy variables ( e quatio ns 7 and 8 in Tab le 5 ) .
In all e quatio ns, g o ve rnme nt e xpe nditure turns o ut to have an adve rse e ffe c t o n po ve rty re duc tio n. The e stimate d c o e ffic ie nts rang e fro m –0. 27 to –0. 44, indic ating that a 1 pe rc e ntag e po int inc re ase in the share o f g o ve rnme nt e xpe nditure in GDP has be e n asso c iate d with 0. 27–0. 44 pe rc e ntage po int inc re ase in po ve rty. While pro pe rly targe te d go ve rnme nt expe nditure s may he lp t he p o o r o ut o f p o ve rt y, lac k o f f isc al d isc ip line — as nume ro us st ud ie s sug g e st — c an b e an impe dime nt to g ro wth and po ve rty re duc tio n.3 6 Similarly, hig h inflatio n also has had an adve rse
SECTI ON I V EMPI RI CAL ANALYSI S
32 It is inte re sting to no te that tho ug h aid to EAP ( as a pe rc e ntag e o f GNI) is the se c o nd lo we st, it is, as the re g re ssio n re sults indic ate , also the mo st e ffe c tive .
33 The thre e mac ro e c o no mic po lic y variab le s are o pe nne ss, g o ve rnme nt e xpe nditure , and inflatio n.
34 Interesting ly, o nce we intro duce interactio n terms and regio n dummies, the co efficient beco mes smaller and no t significant ( e quatio ns 7 and 8 ) .
35 We did so me pre liminary e xpe rime nts with a me asure o f o pe nne ss that re plac e s trade share s with a dire c t me asure o f trade po lic y, name ly, impo rt dutie s as a share o f to tal impo rts. Altho ug h the numb e r o f o b se rvatio ns de c re ase s b y ne arly half due to missing data o n impo rt dutie s, the re sults are qualitative ly similar. In o the r wo rds, g re ate r o pe nne ss, me asure d b y lo we r duty rate s, is asso c iate d with a de c line in po ve rty. Ho we ve r, this re sult fails to b e sig nific ant at the 1 0 pe rc e nt le ve l.
e ffe c t o n po ve rty re duc tio n e ve n tho ug h mo st o f its c o e ffic ie nts are fo und to be no t statistic ally sig nific ant.
V. CONCLUSI ONS
This paper takes a fresh lo o k at the issue o f aid effectiveness fro m a macro eco no mic perspective. An impo rtant po int o f de parture fo r this study is that it e xamine s the issue fro m the pe rspe c tive o f po ve rty re duc tio n, rathe r than e c o no mic g ro wth as the go al o f e c o no mic assistanc e. This shift in fo c us is mo tivate d b y the c hang ing inte rnatio nal pe rspe c tive o n de ve lo pme nt.
The main fo c us o f the paper is to assess quantitatively the impac t o f aid o n po verty reduc tio n. The mo st impo rtant re sult that e me rge s fro m the pre se nt exe rc ise is that aid and aid- square d bo th have sig nific ant c o effic ients but with different sig ns ( po sitive fo r aid and neg ative fo r aid- squared) . This re sult sho ws that aid is e ffe c tive whe n it is mo de rate in vo lume but be c o me s ine ffe c tive when the size o f the aid pro g ram e xc e e ds a c ritic al value se t by the abso rptive c apac ity o f the c o untry c o nc e rne d .
The pape r also e xplo re s the c ausal link be twe e n mac ro e c o no mic po lic y and aid e ffe c tive ne ss in reduc ing po verty. In c o ntrast with the Burnside and Do llar finding s, o ur reg ressio n results indic ate that the effec tiveness o f aid in reduc ing po verty is no t c o ntingent o n the mac ro po lic y enviro nment. Similarly, with re g ard to aid inte rac tio n with the quality o f go ve rnanc e,3 7 the re sults sug ge st that
aid e ffe c tive ne ss do e s no t hinge o n the le ve l o f quality o f go ve rnanc e. In o the r wo rds, while the mac ro po lic y e nviro nme nt and the quality o f go ve rnanc e have a dire c t be aring o n po ve rty re duc tio n, the e ffe c tive ne ss o f aid is no t c ritic ally c o ntinge nt o n the m. Aid has o n ave rage be e n e ffe c tive, o ur re g re ssio n re sults c o nfirm, unde r a who le varie ty o f c irc umstanc e s— in te rms o f po lic y e nviro nme nts and quality o f go ve rnanc e — in a wide dive rsity o f de ve lo ping c o untrie s.
With respect to the impact o f macro eco no mic po licy o n po verty reductio n, the paper o ffers mixed re sults. Taking a mo re disag g re g ate d lo o k at the diffe rent e le ments o f mac ro e c o no mic po lic ie s, we find that so me regressio n equatio ns suggest that o penness has a po sitive impact o n po verty reductio n. That is, greater o penness helps reduce po verty, a result that is co nsistent with a large bo dy o f literature in this are a. The e ffe c t o f o pe nne ss o n po ve rty reduc tio n, ho we ve r, disappe ars o nc e the inte rac tio ns o f aid wit h t he q ualit y o f g o ve rnanc e ind e x o r wit h t he mac ro e c o no mic p o lic y variab le s are intro duc e d. The size o f g o ve rnme nt e xpe nditure is fo und to have a ne g ative impac t o n po ve rty re d uc tio n.
Do e s aid e ffe c tive ne ss vary by re g io n? We find that aid has be e n mo re e ffe c tive in the East Asia and the Pac ific ( EAP) c o mpare d to in o the r re g io ns. EAP c o untrie s have sho wn faste r po ve rty re duc tio n than c o untrie s in the o the r are as e ve n afte r c o ntro lling fo r initial c o nditio ns and po lic y differences. On the o ther hand, Sub-Saharan African ( SSA) co untries have sho wn slo wer po verty reductio n e ve n afte r c o ntro lling fo r all o the r fac to rs. This indic ate s that the re are fac to rs abo ve and be yo nd tho se c apture d by the mac ro e c o no mic po lic y and g o ve rnanc e variable s that favo r EAP and disfavo r SSA in po ve rty re duc tio n. The y may have to do with so c ial, c ultural, and g e o g raphic al fac to rs no t c apture d in the analysis.
