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

(0.53) (0.13) (0.56) (0.75) (1.47) (0.56)Time in office -0.001 -0.028 -0.002 -0.007 -0.037 -0.008

(0.02) (0.71) (0.04) (0.15) (0.51) (0.17)Time in office, squared 0.002 0.003 -0.002 0.002 0.003 -0.001

(0.97) (1.98)** (0.68) (1.03) (1.16) (0.49)Ethnic fractionalization 0.026 0.007 0.030 0.027

(1.64) (0.46) (1.89)* (1.44)Ethnic fractionalization, squared -0.000 -0.000 -0.000 -0.000

(2.08)** (1.50) (2.29)** (2.08)**Instability 0.325 0.312 0.339 0.292 0.383 0.319

(1.95)* (1.90)* (1.80)* (1.71)* (1.58) (1.63)Democracy 0.023 0.005 -0.016 0.014 0.020 -0.023

(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

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