Does Political Instabilityin Developing Countries Attract More Foreign Aid?

1. Presented By
Ayush Nepal
Barsha Shrestha
Chhokpa Sherpa
Prakash Pandey
Pramila Nepal

2. Introduction
Political Factor – Influencing Aid Allocation
Investigation – Panel Approach
Models
Fixed Effect
Random Effect Approach
 Net per Capita ODA among 50 developing countries
period 1990-2012.
8 Risk Indices used
5 significant impact on aid allocation
Indicators of Governance = 4
Indicator of Internal Conflict 5th
Effect on donors’ allocation of aid

3. Literature Review
 Cline and Sargen (1975), Aid allocation that addresses recipients’
needs also has to reward good economic performers/policies
through positive incentives.
 McKinley and Little, (1978) Foreign aid being allocated based on
recipient countries need or donors strategic or political interest.
 Burnside and Dollar, (2000) Multilateral aid in particular World
Bank aid considers recipients’ “good economic policies” but that
bilateral aid does not.
 Guillaumont & Chauvet, (2001)Countries that are more
vulnerable must receive more aid.
 Collier and Dollar (2002), Aid is poverty-efficient in a good
policy environment.

4. Objective of the Study
 To study about the Disbursement of Official
Development Assistance.
 To elucidate the type of Political Risk & Recipient
Countries characteristics.
 To identify and analyze the impact of political
instability during the aid allocation.

5. Regression Equation Based
on Fixed Effect Model
lnACAPit=α i+ β1 Rjit + β2 Nit + β3Sit + β4 Mit+ β5
lnPit +εit
Where,
ACAPit = Dependent aid per capita variable
Rjit = Risk indices (j =kind of risk),
Nit = Set of recipient countries’needs
Sit = Donors strategic interest
Mit = Merit variables
Pit = Recipient countries populations.

6. Regression Equation Based
on The Insight of The
Random Effect Model
lnACAPit=α + β1Rjit + β2Nit+ β3Sit+ β4Mit+
β5lnPit + μit + εit

9. Empirical Results Analyzing
the Determinants of Foreign
Aid
Oil Exporter - Significantly Positive
Correlation.
Per Capita/GDP/PPP- Significantly Negative
Correlation.
Population - Significantly Negative Correlation.
Trade & Democracy- Significantly Negative
Correlation.

10. Empirical Results
Analyzing the Variable of Interest:
Impact of Each Variable on Foreign
Aid
Government Stability (Case 1)Significantly
Positive
Law and Order (Case 3) Significantly Positive
Bureaucratic Quality (Case 4) Significantly
Positive
Corruption (Case 5) Significantly Negative

11. Empirical Results
Ethnic Tension
An Index used to Proxy Internal Conflict.
Measures the Degree of Tension.
Index - A Significantly Positive Influence.
Aid Sufficiently Fungible into Military Expenditure.
A Positive Association Between Ethnic Tension &
Aid Flow.
Index Signals Donor’s Strategic Motive or Altruistic
Behavior.

12. Compared Testing: Fixed Effect Model V/S Random
Effect Model
 Five Risk Indices Under Fixed Effect Model and Random
Effect Model.
 Hausman Specification Test.
 Reject Null Hypothesis because the Preferred Model has
Fixed Effect.
 For all the Five Risk Indices Exerting Significant Influence
on Aid.
Random Effect Model is The Preferred Model.
Results

13. Military in Politics, Religion in Politics &
Socio-economic Condition
Treated as a merit/demerit variable
Socioeconomic - need variable or a merit variable
Exert no influence in donors’ allocations of aid
Donors are indifferent towards recipients experiencing autocracy,
lack of civil liberty or political right.
 Purpose of ODA
Addressing the need of the poor nation
 Insignificant relationship between aid inflow and this index
signals.
Results

14.  There exists direct or indirect influence of eight risk
indices on donor’s allocation of aid.
 Aid allocation is highly influenced by instability of
the receiving country.
 Disbursement of ODA is highly determined by the
political risk factor.
 Donors have significantly high self interest.
 Aid may be motivated by altruistic reasons or self
interest.
Conclusion

15. Thank