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Foreign aid and productivity

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Abstract

The Millennium Summit 2000 and the declaration of the Millennium Development Goals again brought to the fore questions on the importance of foreign aid. Consequently, the long debated question of whether or not foreign aid enhances economic growth and efficiency in resource use received renewed attention. However, consensus has still eluded researchers and policy makers. In spite of numerous studies, there is little evidence of a significant positive effect on the long-term growth of poor countries. While most previous studies have relied on simple cross country regressions, this study suggests a new approach, evaluating country performance in a production theory context using productivity as a measure, applying the non-parametric Malmquist Productivity Index and then linking this country performance to amount of foreign aid received. A balanced panel of 89 low and middle income countries from five different geographical categories is studied over a period of 11 years. By use of a novel visual test the countries are grouped into three categories, significant productivity decline, growth or no change. The different categories are based on confidence intervals resulting from bootstrapping. When linking country performance to aid in a more traditional way, a significant, but weak correlation is found.

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Notes

  1. Although foreign aid has a number of different objectives, growth has been the main yardstick judging aid effectiveness. Radelet (2006) claims that most aid is designed to meet at least one of the following goals: (1) economic growth stimulation (2) human capital strengthening, (3) subsistence consumption support, or (4) economy stabilisation after economic shocks.

  2. Exceptions are Veiderpass and Andersson (2011) and Juselius et al. (2013).

  3. The actual years of study should, however, not be given too much attention since the main interest of this study is not the presentation of productivity change per se, but rather finding any potential link between productivity growth and aid. Other time periods would serve this purpose equally well.

  4. The authors emphasise though that the standard growth regression analysis based on a four year panel data is an inappropriate tool for examining the effects of these two types of aid.

  5. For a more detailed presentation of different Farrell-type efficiency measures and their application to non-parametric efficiency and productivity measurement, see, for example, Hjalmarsson and Veiderpass (1992a).

  6. It should be noted that these measures are equal for constant returns to scale (CRS) frontiers.

  7. The Malmquist index (1) can be decomposed into catching up, MC i , measuring the relative distance of the observation to the frontier, and technology shift (MF i ) maintaining the circularity of the frontier shift.

  8. It should be noted that the production unit in this study is a country and that the output of the country is GDP while inputs (resources used to produce GDP) are labour and capital.

  9. Most of the data have not yet been published. The author is grateful to Penn University for making requested information available.

  10. As already shown by Efron and Tibshirani (1993), constructing a bias-corrected estimator would introduce additional noise into the procedure.

  11. For a thorough presentation and application of this novel approach, see Førsund et al (2015).

  12. Very small units are, however, found in all three intervals.

  13. Liberia is not visible in the diagram as the productivity axes is truncated at M=2.

  14. World Development Indicators also include Haiti and Puerto Rico in this category. Due to missing values, these countries are not included in the balanced panel of this study.

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Acknowledgments

I am most grateful to Sverre A.C. Kittelsen and Dag Fjeld Edvardsen for computational assistance. I am also grateful to three anonymous referees and to participants in the Conference in Memory of Lennart Hjalmarsson, for constructive comments.

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Authors and Affiliations

  1. Department of Economics, School of Business, Economics and Law, University of Gothenburg, Gothenburg, Sweden

    Ann Veiderpass

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  1. Ann Veiderpass
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Correspondence to Ann Veiderpass.

Appendix 1: Geographical categories

Appendix 1: Geographical categories

Countries of study by Geographical Categories, in accordance with World Development Indicators, World Bank 2006.

  • Category Sub-Saharan Africa (SSA)

    Benin, Botswana, Burkina Faso, Burundi, Cameroon, Central African Republic, Chad, Congo (Democratic Republic of), Congo (Republic of), Ivory Coast, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Niger, Nigeria, Mozambique, Namibia, Rwanda, Senegal, Sierra Leone, Sudan, Swaziland, Tanzania, Togo, Uganda, South Africa, Zambia, Zimbabwe.

  • Category East Asia and Pacific (EAP)

    Cambodia, China, Hong Kong, Indonesia, Korea,Rep., Laos, Malaysia, Mongolia, Philippines, Singapore, Thailand.

  • Category Latin America and Caribbean (LAC) Footnote 14

    Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Rep. Ecuador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, El Salvador, Trinidad and Tobago, Uruguay, Venezuela.

  • Category Middle East and North Africa (MNA)

    Algeria, Egypt, Iran, Israel, Jordan, Kuwait, Morocco, Oman, Saudi Arabia, Syria, Tunisia, Turkey, United Arab Emirates.

  • Category South Asia (SAS)

    Bangladesh, Bhutan, India, Nepal, Sri Lanka, Pakistan.

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Veiderpass, A. Foreign aid and productivity. J Prod Anal 43, 249–258 (2015). https://doi.org/10.1007/s11123-015-0440-4

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  • DOI: https://doi.org/10.1007/s11123-015-0440-4

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