Lecture 11 econ 313 gabe

Lecture 11 econ 313 gabe - Lecture 11: Foreign aid...

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Lecture 11: Foreign aid Readings: Todaro, Chapter 14
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Foreign aid: 2 main questions 1. Who gives to whom? And why? Is aid solely given to reduce poverty? 1. Even if aid were given to reduce poverty, does it have an impact on poverty? Theoretically Empirically
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I. Determinants of aid  Two stated goals: Reduce market imperfections (international credit market) Reduce poverty by redistributing towards the poorest Developed countries promised 0.7% of GDP to be sent as foreign aid.
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Official Development Assistance Flows of official financing administered
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Who gives foreign aid to whom and  why? Alesina, Dollar (2000) 2 questions: Is aid given for political, strategic reasons, or to reduce poverty? Does aid encourage “good” policies?
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Foreign aid
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Variables Openness (to trade): Sachs tariff index Democracy: score between 1 and 7 – the higher the more democratic UN friend: correlation between votes of giving and recipient country at the UN general assembly Egypt, Israel: dummy for these countries -
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Results Income: + (give to rich!) Openness, democracy: + UN friends: +, Egypt: +, Israel: + Years a colony: + FDI value more economic than political reasons
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Results
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Results
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Results
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Results
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Results
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Results
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Results
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Results USA: Egypt, Israel France: colonies, no democracy, low income Japan: UN friend Everybody gives to their UN friends Scandinavia + USA reward democracy
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Does aid reward democratization? 59 episodes of democratization Average aid per capita: 3 years before episode: 27$ 3 years during the episode: 41$ 3 years after the episode: 35$
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Does aid reward democratization?
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Conclusion Aid is not focused primarily towards poverty reduction Aid is given for political, strategic reasons Now, and for the rest of the lecture, let us imagine that aid was given out in a purely altruistic way Would it work?
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II. Impact of aid on poverty Theoretical underpinning for aid: The big push theory Popularized by Jeffrey Sachs (2005), “The end of Poverty: Economic Possibilities of our Time” Based on the poverty trap argument: If unlucky to be born poor in a poor country Independently of your intelligence, dynamism, talent, You will stay poor Because of market failures (coordination failures (lecture 3), poor institutions (lecture 5), credit market imperfections (lecture 7), bad health (lecture 9), no insurance (lecture 10)). “At the bottom of the well, the first step on the ladder is too high up” However, a massive investment across the board would allow the poor to climb that first step Then they would continue climbing by themselves
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II. Impact of aid on poverty Simple model, 3 actors: Donor (D) Government (G) NGO (N) Beneficiaries There are policies x X Broad interpretation of x: Transfers towards the poor Structural adjustment policies Build an army Intermediaries
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This note was uploaded on 03/10/2012 for the course ECON 313 taught by Professor Iforget during the Winter '10 term at McGill.

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Lecture 11 econ 313 gabe - Lecture 11: Foreign aid...

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