Why do countries receive procyclical or countercyclical aid?
- Empirical results
- Good institutions - countercyclical aid
- Weak institutions - procyclical aid
- Which institutions?
- Government effectiveness
- Public sector transparency
- Corruption
- Expropriation risk
- Political freedom
- Ethnic tension
- Robust
- Within countries
- Between countries
- Level of GDP
- Aid/GDP
- Volatility of GDP
- Volatility of Aid
- Conflict/Coups
The negative relationship between institutional quality and the corr (Aid, GDP) is robust to a multitude of control variables e.g.:
*Level of GDP
*Aid/GDP ratio
*Volatiltiy of GDP
*Volatility of Aid
*Conflicts
*Coups
*Political system
*Constraints on the executive
*Civil liberties
*(and more)
- Why institutions?
- Case study
- Donor care about cause of downturn
- (a) Exogenous
- (b) Bad government policy/actions
- Good institutions
- Differentiate (a) from (b)
- Weak institutions
- Hard to differentiate (a) from (b)
- Institutions affect the information available to donor
- Weak institutions
- Procyclical aid
- Carrot for government action
- Increases welfare
- Good institutions
- Aid as insurance
- Smooth out shocks
- Why is this important?
- Are the cyclical properties of aid inefficient?
- No
- Weak institutions
- Harder to observe government actions
- Procyclical aid to encourage good government actions
- Can't use aid to simultaneously smooth out shocks
- Good institutions
- Observe government actions
- Aid conditional on action
- Countercyclical aid to smooth out shocks
- Dynamic moral hazard model
- Institutions affect information donors have about government policy