Cut from the Same Cloth? Multilateral vs. Bilateral Aid

Cut from the Same Cloth?
Multilateral vs. Bilateral Aid
Desha Girod
Stanford University
November 2008

Development is elusive to some
impoverished i states t that t receive aid
For example: DR Congo, Somalia
In other impoverished states, governments
seem to facilitate development with aid
For example: EU ascension states,
Ghana, Mozambique
Uganda, Guatemala
2

The puzzle and the literature
Why do some governments use aid
better than others?
Aid Donor threat to Reform Growth
withdraw is
credible
Studies have identified several cases
when donors’ threat to withdraw is
credible
All donors: After the Cold War (Dunning 2004; Bearce and Tirone 2008)
IMF: When a strategic interest is not at stake (Thacker 1999; Stone 2002)
3

The puzzle and the theory
Why do some governments use aid better than
others?
Aid Donor threat to Reform Growth
withdraw is
credible
Bilateral v. Multilateral aid
Multilateral t l donors are less likely l to coordinate on
any particular strategic interest than bilateral donors
4

Method: Quantitative analysis
- Existing dataset on determinants
of aid and on determinants of
growth
- Previously undisclosed data on
reform from the World Bank
5

Contribution: Multilateral aid works
better than bilateral l aid
New evidence to explain the effects
of aid on development:
Positive effects only for multilateral aid, with
conditions that are more likely to be
enforced.
6

Outline
I. Theory
II. Statistical tests
III. Conclusion
7

Reform requires incentives
Donor countries disburse aid with many objectives.
Theory
Donor goal
Aid Conditions
Includes strategic
(bilateral)
Unenforceable
Mainly development
(multilateral)
Enforceable
Hypothesis 1a: Multilateral donors should disburse greater amounts of
aid to governments that comply py with reform more.
Hypothesis 1b: Bilateral donors should not disburse greater amounts of
aid to governments that comply with reform more.
8

Growth requires reform
Theory
Policies that limit the executive’s ability to be
predatory are common across reforms over time.
Hypothesis 2a: States receiving higher amounts of multilateral aid
should experience more growth than states receiving lower
amounts of multilateral aid.
Hypothesis 2b: States receiving higher amounts of bilateral aid should
not experience more growth than states receiving lower amounts
of bilateral aid.
Why does multilateral aid work?
Hypothesis 3: Reform should positively affect growth while suppressing
the positive effects of multilateral aid on growth.
Why do leaders need enforceable conditions to
implement reform?
Unconditional aid = resource wealth
Pressure to invest in immediate needs and interests
9

Tests of the theory
Reform Aid?
Hypothesis 1a: Multilateral donors should disburse greater amounts of
aid to governments that t comply with reform more.
Hypothesis 1b: Bilateral donors should not disburse greater amounts of
aid to governments that comply with reform more.
Aid Growth?
Hypothesis 2a: States receiving higher amounts of multilateral aid
should experience more growth than states receiving lower
amounts of multilateral aid.
Hypothesis 2b: States receiving higher amounts of bilateral aid should
not experience more growth than states receiving lower amounts
of bilateral aid.
Reform Growth?
Hypothesis 3: Reform should positively affect growth while suppressing
the positive effects of multilateral aid on growth.
10

Hypotheses 1
Aid for reform?
Sample: Panel of developing-country years, 1964-1999
1999
Dependent variable(s): Multilateral aid, Bilateral aid
Independent variable: Reform (lagged)
Model: Tobit
11

Hypothesis 1
Aid interests ests of multilateral ut atea and
bilateral donors diverge
AID FLOWS: MULTILATERAL BILATERAL
Reform 0.141** 0.024
(lagged) (0.062) (0.038)
+ controls
12

Hypothesis 1
Aid interests ests of multilateral ut atea and
bilateral donors diverge
AID FLOWS: MULTILATERAL BILATERAL
Reform 0.141** 0.024
(lagged) (0.062) (0.038)
Cold War 0.046046 0.103***
(0.028) (0.024)
+ controls
13

Tests of the theory
Reform Aid? Yes for multilateral
Hypothesis 1a: Multilateral donors should disburse greater amounts of
aid to governments that t comply with reform more.
Hypothesis 1b: Bilateral donors should not disburse greater amounts
of aid to governments that comply with reform more.
Aid Growth?
Hypothesis 2a: States receiving higher amounts of multilateral aid
should experience more growth than states receiving lower
amounts of multilateral aid.
Hypothesis 2b: States receiving higher amounts of bilateral aid should
not experience more growth than states receiving lower amounts
of bilateral aid.
14

Hypothesis 2
Does aid encourage growth?
Multilateral vs. Bilateral aid
Sample: 64 country-four-year year periods, 1966-1997
1997
Dependent variable: Annual growth (4-year average)
Independent variable(s): Multilateral aid, Bilateral aid
Model: OLS regression
15

Hypothesis 2
Multilateral aid facilitates growth
Dependent variable: Annual growth (4-year average)
Multilateral aid 0.318**
(0.144)
+ controls
Bilateral aid -0.022
(0.113)
+ controls
Total aid 0.051
(0.156)
+ controls
16

Results Hold Across
Alternative Specifications
- Period fixed effects
- Excluding outliers
- Controlling for Sachs Warner (SW) Index
- Controlling for budget balance
- Controlling for SW index and budget
balance
- Controlling for human capital
- Controlling for domestic investment
- Accounting for endogeneity
- Including other regions
17

Tests of the theory
Reform Aid? Yes for multilateral
Hypothesis 1a: Multilateral donors should disburse greater amounts of
aid to governments that t comply with reform more.
Hypothesis 1b: Bilateral donors should not disburse greater amounts
of aid to governments that comply with reform more.
Aid Growth? Yes for multilateral
Hypothesis 2a: States receiving higher amounts of multilateral aid
should experience more growth than states receiving lower
amounts of multilateral aid.
Hypothesis 2b: States receiving higher amounts of bilateral aid should
not experience more growth than states receiving lower amounts
of bilateral aid.
Reform Growth?
Hypothesis 3: Reform should positively affect growth while suppressing
the positive effects of multilateral aid on growth.
18

Hypothesis 3
Why does multilateral aid work?
Sample: 64 country-four-year periods, 1966-1997
Dependent variable: Annual growth (4-year average)
Independent variable: Multilateral aid
Mediator variable: Reform
Model: OLS regression
19

Hypothesis 3
Reform links multilateral aid and growth
Dependent variable: Annual growth (4-year average)
(1) (2)
Multilateral aid 0.429** 0.341*
(0.180) (0.178)
Reform 1.805***
(0.628)
+ controls
20

Tests of the theory
Reform Aid? Yes for multilateral
Hypothesis 1a: Multilateral donors should disburse greater amounts of
aid to governments that t comply with reform more.
Hypothesis 1b: Bilateral donors should not disburse greater amounts
of aid to governments that comply with reform more.
Aid Growth? Yes for multilateral
Hypothesis 2a: States receiving higher amounts of multilateral aid
should experience more growth than states receiving lower
amounts of multilateral aid.
Hypothesis 2b: States receiving higher amounts of bilateral aid should
not experience more growth than states receiving lower amounts
of bilateral aid.
Reform Growth? Suggests yes
Hypothesis 3: Reform should positively affect growth while
suppressing the positive effects of multilateral aid on growth.
21

Conclusion: Findings
1. Multilateral aid helps. Reform is a
mechanism.
2. Bilateral aid doesn’t help
3. Plausible reason for divergence: Bilateral aid
is more subject to the “aid curse”
22

Conclusion: Implications
1. Enforcement of conditions matters
2. Tension exists between strategic and
development interests of donors
3. Rise in unconditional bilateral aid (War
on Terror, China) could reduce
prospects for growth
4. What can be done? Tie the hands of
bilateral donors
23