The impacts of foreign aid on the receiving countries have often been disappointing. In this series of projects we try to find out why, so as to be able to propose policy recommendations that both the donors and recipients can follow.
In Bolivia´s case the problem seems to be that aid projects, as well as an artificially oversized and generous public sector inflated by foreign aid, divert the few skilled workers away from productive local activities, which severely limits the countries capacity for sustainable growth.
At the same time foreign aid tends to increase the income inequality of the country, as it creates numerous high salary job placements for highly skilled people, while the poor receive baths, environmental education, reproduction advice and various other services that may or may not improve their quality of life, but in general don´t improve their incomes.
1) The dynamic impacts of aid on the behavior of recipients
Aim: this project analyses at a micro level the dynamic impacts of the remittances, which will enable an understanding of how households change their behavior in reaction to significant sums of unconditional aid. For this purpose we will study how these remittances affect college attendance, job supply, consumption patterns, the propensity to invest and future social mobility.
The data used in this experiment was taken from two standard of life measurement surveys that were conducted in Nicaragua in 1998 and 2001. The great advantage of this data is that it follows the same people through time. This type of longitudinal data is infrequent in developing countries, despite the fact that it is extremely useful for indentifying coincidences, rather than just correlations. Nicaragua provides an excellent case study for the effects of external aid, as the country receives important sums of both remittances (approximately 10% of GDP) and official development aid (also around 10% of GDP).
Project director: Lykke Anderson
Other participants: Oscar Molina, Bent Jesper Christensen (Aartus University, Denmark)
Funding/collaboration: Global Development Network and Aartus University. This project won the “2004 Global Development Award for Outstanding Research on Development”
- “The Impact of Aid on Recipient Behavior: A Micro-Level Dynamic Analysis of Remittances, Schooling, Work, Consumption, Investment and Social Mobility in Nicaragua” Development Research Working Paper Series No. 02/2005.
2) Effectiveness of foreign aid in Bolivia
Aim: this project studies the effectiveness of foreign aid in Bolivia. When the accumulated aid for each sector between 1998 and 2002 is compared with the progress of each sector during the same time span, it is clear that by far the most supported four sectors (institutional reinforcement, rural development, roads and budget support) show disappointingly little progress. When the impact is analysed with the a computable general equilibrium model it can be clearly seen that the aid tends to have a positive impact on growth, but only in the short term, and an adverse impact on income distribution.
Project director: Lykke E. Anderson
Other participants: José Luis Evia
Funding/collaboration: British Department for International Development (DFID-UK), Spanish Department of Development, Milenio Foundation.
- “The Effectiveness of Foreign Aid in Bolivia” Development Research Working Paper Series No. 01/2003.
- “La Efectividad de la Ayuda Externa en Bolivia.” Development Research Working Paper Series No. 02/2003.
3) Foreign aid and Productivity
Aim: this paper empirically reexamines the soundness of concurrent theories on the effectiveness of external aid. By changing the focal point from the impact of aid on income to the impact of aid on productivity, it is possible to test three existing theories on effectiveness of foreign aid. The results support the following hypotheses: i) foreign aid has a positive impact by promoting growth of average productivity ii) foreign aid with decreasing returns is ineffective iii) the magnitude of the overall effect depends on circumstances related to the economic climate. The results support the policies previously recommended by the literature, of reconsidering the rule of compliance for foreign aid expenditures.
Project director: Pablo Selaya
Funding/collaboration: Copenhagen University, Denmark
- “To Aid or Not to Aid: Foreign Aid and Productivity in Cross-Country Regressions” Development Research Working Paper Series No. 03/2005.
4)Labor Movility in Bolivia: job search behavior of employed workers in both the private and public sector
Aim: this project compares the behavior of employed workers of both the public and private sector in Bolivia. Empirical evidence shows that qualified workers are scarce, and that the private sector has difficulties in finding and maintaining the skilled labor that is needed since the qualified workers find the favorable conditions of the private sector more attractive (better salaries, fewer working hours, more job security, worker benefits). The imbalance between the public and private sector is probably fueled by the large influxes of foreign aid to the government (around 10% of GDP).
Project Director: Lykke E. Anderson
Other participants: Bent Jesper Christensen (Aartus University, Denmark), Claudia Delgadillo
Funding/collaboration: Aartus University