The costs of favoritism: Is politically-driven aid less effective? Axel Dreher (Georg-August University Göttingen, KOF, CESifo, IZA) Stephan Klasen (Georg-August University Göttingen) James Raymond Vreeland (Georgetown University) Eric Werker (Harvard Business School) Presentation by James Raymond Vreeland For The Political Economy Seminar Series at Princeton University October 26, 2009
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The costs of favoritism: Is politically-driven aid less effective?
The costs of favoritism: Is politically-driven aid less effective?. Axel Dreher (Georg-August University Göttingen, KOF, CESifo, IZA) Stephan Klasen (Georg-August University Göttingen) James Raymond Vreeland (Georgetown University) Eric Werker (Harvard Business School) - PowerPoint PPT Presentation
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The costs of favoritism:Is politically-driven aid less effective?
Axel Dreher (Georg-August University Göttingen, KOF, CESifo, IZA)Stephan Klasen (Georg-August University Göttingen)James Raymond Vreeland (Georgetown University)Eric Werker (Harvard Business School)
Presentation by James Raymond Vreeland For The Political Economy Seminar Series at Princeton UniversityOctober 26, 2009
Work in progress: Since the draft…
• New theory!
• New data!
• New results!
• Even a New co-author!
• All of this for just the price of an Amtrak ticket from Washington, DC!
The plan:
• The question
• The debate
• The approach
• The analysis
• Conclusion
The question:
• Is politically motivated aid less effective?
The debate:
• Critics argue aid (e.g., World Bank lending) has failed (e.g., Easterly)
• Some say the problem is politics (e.g., Stone)
• Others argue political motivations have faded (e.g., Bermeo)
• Still others say that multi-lateral sources are less influenced by politics (e.g., Tobin)
Do international politics matter for lending?
World Bank, FAQ, www.worldbank.org
• “It is true that during the Cold War years aid was politically motivated.
• “Now however aid is being delivered to countries most in need,
• “and to those who show they are determined to use it well.”
World Bank projects & UNSC membership
0.0
0.5
1.0
1.5
2.0
2.5
avg=1.29
std=1.95
avg=2.13
std=2.93
avg=1.28 avg=1.30
std=1.96 std=1.93
avg=2.15 avg=2.10
std=2.96 std=2.92
avg=2.06 avg=2.19
std=2.75 std=3.11
n=176 n=181
Non-
n=5333 n=357
member Member
Total sample
avg=1.29
std=1.95
n=5333
Non-member
1st.yearmember
2nd yearmember
Over time
n=2638 n=183 n=2695 n=174
Non-member
Member Non-member
Member
During the cold war After the cold war
Source: Dreher, Sturm, Vreeland (2008)
So politics are important…
• … but so what?
• Are there any costs of this favoritism?
The approach:
• Dependent variable:– World Bank project evaluations– Better than other outcome variables (e.g., economic
growth) – less noisy– Independent (Independent Evaluation
Group/Operations Evaluation Department)
• Independent variables:– (Elected) United Nation Security Council Membership– “Seat” on the World Bank Executive Board
The data analysis
Data on World Bank project quality
• World Bank’s Independent Evaluation Group (2009): – Discrete performance measure generated by
World Bank project managers and evaluators
• 8,405 projects from 152 countries
– First project approved in 1956, last in 2006
– First project ends in 1964, last in 2007
– Average project takes 6 years, longest 22 years
• 73% of the projects rated “satisfactory” (27% “unsatisfactory”)
Empirical setup
• Model: Logit (with fixed effects)
• Dependent variable: indicator for successful evaluation
• Project-level panel: 1975-2003
• Control variables follow Dollar & Svensson (2000)
– time in office & squared term– ethnic fractionalization & squared term– “instability”– democracy
Satisfactory Project Evaluation, Logit
Satisfactory Project Evaluation, Logit
(t-stats in parentheses)
Accounting for the Cold War
(Bermeo 2008)
Satisfactory Project Evaluation, Logit, Cold War period (1) (2) (3) (4) (5) (6)
UNSC, approval time -0.477 -0.601 -0.473(2.25)** (2.38)** (1.72)*
UNSC, evaluation time -0.193 -0.323 -0.155(0.79) (1.37) (0.66)
WB Executive Board member 0.265 0.114 -0.126 approval time (1.05) (0.30) (0.57)WB Executive Board member -0.068 -0.440 -0.060 evaluation time (0.20) (1.60) (0.22)Short-term debt -0.005 0.001 -0.004 -0.006 -0.017 -0.005
(1.32) (0.33) (0.54) (0.76) (0.80) (0.91)(log) GDP p.c. -0.185 0.111
(1.24) (0.39)(log) Population 0.038 0.069
(0.49) (0.67)East Asia, dummy 0.625 0.475
(1.83)* (1.05)Latin America, dummy -0.463 -0.907
(1.93)* (2.97)***Middle East, dummy -0.105 0.188
(0.22) (0.38)South Asia, dummy 0.421 0.410
(0.96) (0.83)Sub Saharan Africa, dummy -0.348 0.106
(0.75) (0.18)Constant 0.810 2.028 0.711 -0.716
(2.56)** (1.10) (2.12)** (0.23)Country fixed effects no no yes no no yesPeriod <1991 <1991 <1991 <1991 <1991 <1991Number of observations 1387 1314 1352 1390 515 1355log likelihood -813.88 -741.25 -626.83 -816.29 -290.95 -629.06Pseudo R2 0.03 0.05 0.01 0.02 0.07 0.01approval = evaluation (Prob>chi2) 0.38 0.43 0.41 0.45 0.26 0.86
Satisfactory Project Evaluation, Logit, Cold War period
Satisfactory Project Evaluation, Logit, Post-Cold War period
Satisfactory Project Evaluation, Logit, Post-Cold War period
Accounting for “vulnerability” (Stone, 2008)
• Strategic interests only matter if financing is a high priority for the borrower
• From a borrower’s perspective, influence is a valuable resource, used only when the stakes are high
"The effects of the borrower’s strategic importance should be conditional on the borrower’s external vulnerability"
• Stone suggests:– Short-term debt– Debt service
Table 5: Satisfactory Project Evaluation, Interaction with vulnerability
Summary
• UNSC membership reduces the probability of successful evaluation by about 0.11 during the Cold War period
• With extreme short-term debt (around 40 short-term/total), UNSC membership reduces the probability of a satisfactory evaluation by about 0.2 (whole period)
• With debt service of 15% (GNI), UNSC membership reduces the probability of a satisfactory evaluation by about 0.2 (whole period)
• Otherwise, no effects– UNSC membership during post-Cold War not facing extenuating
circumstances– World Bank Executive Board membership
• Conclusion:– The World Bank may be doing a good job administering
political aid in all but the most challenging circumstances