The document summarizes a study on the impact of political risk factors on aid allocation among 50 developing countries from 1990-2012. Regression analyses using fixed effect and random effect models found that 5 risk indices had significant influence on aid: government stability, law and order, bureaucratic quality, and corruption (negatively). Ethnic tension was also found to have a positive association with aid, possibly signaling donors' strategic motives. The random effect model was preferred. Overall, the study concluded that donors' aid allocation is highly influenced by political instability in recipient countries and is motivated both by altruism and donors' self-interest.

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