Foreign aid instability and bundled governance dynamics in Africa

Asongu, Simplice A and Nwachukwu, Jacinta C. (2015): Foreign aid instability and bundled governance dynamics in Africa.

Abstract

Purpose- With the recent financial crisis and reduction of foreign aid by donor countries, the aid-institutions debate is shifting to how aid instability affects governance in developing countries. We engage the policy debate by assessing the role of foreign aid instability on governance dynamics in fifty three African countries for the period 1996-2010.

Design/methodology/approach- An autoregressive endogeneity-robust Generalized Methods of Moments is employed. Instabilities are measured in terms of standard errors and standard deviations. Three main aid indicators are used, namely: total aid, aid from multilateral donors and bilateral aid. Principal Component Analysis is used to bundle governance indicators, namely: political governance (voice & accountability and political stability/non violence), economic governance (regulation quality and government effectiveness), institutional governance (rule of law and corruption-control) and general governance (political, economic and institutional governance).

Findings- Our findings show that foreign aid instability increases governance standards, especially political and general governance.

Practical implications- In the presence of foreign aid instability, governments could be constrained to improve governance standards in exchange for, or anticipation of greater dependence on local tax revenues. Moreover, bundling governance indicators improves insights into how macroeconomic variables affect governance. This is essentially because, while aid instability improves general governance, for the most part it is not consistently for economic and institutional governance.

Originality/value- The paper has contributed to the aid-institutions’ literature by examining how aid instabilities affect an aggregate index of governance dynamics in Africa.

• Item Type: MPRA Paper
• Language: English
• Keywords: Instability; Foreign aid; Governance; Development; Africa
• Subjects: C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C53 - Forecasting and Prediction Methods ; Simulation Methods; F - International Economics > F3 - International Finance > F35 - Foreign Aid; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F47 - Forecasting and Simulation: Models and Applications; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development; O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O55 - Africa

References

Amin, S., (2014). “Aid for Development”, Springer Briefs on Pioneers in Science and Practice, 16, pp. 125-137.

Andrés, A. R., & Asongu, S. A., (2013). “Fighting software piracy: which governance tools matter in Africa?”, Journal of Business Ethics, 118(3), pp. 667-682.

Andrés, A. R., Asongu, S. A., & Amavilah, V. H. S., (2015). “The Impact of Formal Institutions on Knowledge Economy”, Journal of the Knowledge Economy, 6(4), pp. 682-703.

Anyanwu, J., & Erhijakpor, A. E. O., (2014). “Does Oil Wealth Affect Democracy in Africa?”, African Development Review, 26(1), pp. 15-37.

Arellano, M., & Bond, S. (1991) “Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations” The Review of Economic Studies 58, 277-297.

Arellano, M., & Bover, O. (1995) “Another look at the instrumental variable estimation of error-components models” Journal of Econometrics 68, 29-52.

Asiedu, E. (2014). “Does Foreign Aid in Education Promote Economic Growth? Evidence From Sub-Saharan Africa”, Journal of African Development, 16(1), pp. 37-59.

Asiedu, E., & Nandwa, B., (2007), “On the Impact of Foreign Aid in Education on Growth: How relevant is heterogeneity of aid flows and heterogeneity of aid recipients?”, Review of World Economics, 143(4), pp. 631-649.

Asongu, S. A., (2012). “Government quality determinants of stock market performance in African countries”, Journal of African Business, 13(3), pp. 183-199.

Asongu, S. A., (2015a). “Institutional benchmarking of foreign aid effectiveness in Africa”, International Journal of Social Economics, 42(6), pp. 543-565.

Asongu, S. A., (2015b). “On taxation, political accountability and foreign aid: empirics to a celebrated literature”, South African Journal of Economics, 83(2), pp. 180-198.

Asongu, S. A., (2016). “Determinants of Growth in Fast Developing Countries: Evidence from Bundling and Unbundling Institutions”, Politics & Policy, 44(1), pp. 97-134.

Asongu, S. A., (2014a). “Development thresholds of foreign aid effectiveness in Africa”, International Journal of Social Economics, 41(11), pp. 1131-1155.

Asongu, S. A., (2014b). “The Questionable Economics of Development Assistance : Hot-Fresh Evidence, 1996-2010”, The Review of Black Political Economy, 41(4), pp. 455-480.

Asongu, S. A., (2014c). “Globalization, (fighting) corruption and development: how are these phenomena linearly and nonlinearly related in wealth-effects?”, Journal of Economic Studies, 41(3), pp. 346-369.

Asongu, S. A., & Jellal, M., (2013). “On the channels of foreign aid to corruption”, Economics Bulletin, 33(3), pp. 2191-2201.

Asongu, S. A., & Nwachukwu, J., (2015). “Revolution empirics: predicting the Arab Spring”, Empirical Economics, http://link.springer.com/article/10.1007%2Fs00181-015-1013-0

Ba, J., & Ng S., (2006). “Confidence intervals for diffusion index forecasts and inference for factor-augmented regression”, Econometrica, 74(4), pp. 1133-1150.

Bai, J., (2003). “Inferential theory for factor models of large dimensions”. Econometrica, 71 (1),pp.135-173.

Bai, J., (2009). “Panel data models with interactive fixed effects”. Econometrica, 77(4), pp. 1229-1279.

Banuri, T., (2013). “Sustainable Development is the New Economic Paradigm”, Development, 56(2), pp. 208-217.

Bernstein, T., & Lu, X., (2008) Taxation and coercion in rural China, in: D. Brautigam, O.H. Fjeldstad and M. Moore (eds) Taxation and State-building in Developing Countries (New York: Cambridge University Press), pp. 89–113.

Blundell, R., & Bond, S., (1998). “Initial conditions and moment restrictions in dynamic panel data models”, Journal of Econometrics, 87(1), pp.115-143.

Bond, S., Hoeffler, A., & Tample, J., (2001). “GMM Estimation of Empirical Growth Models”, University of Oxford.

Collier, P. (2007). The Bottom Billion: Why the Poorest Countries Are Failing and What Can Be Done About It ?, Oxford University Press.

Dang, H-A., Knack, S., & Rogers, F. H.,(2009). “International Aid and Financial Crises in Donor Countries”, World Bank Policy Research Working Paper No. 5162.

Dixit, A., (2009). “Governance Institutions and Economic Activity”, American Economic Review, 99(1), pp. 5-24.

Eubank, N. (2012). “Taxation, Political Accountability and Foreign Aid: Lessons from Somaliland”, Journal of Development Studies, 48(4), pp. 465-480.

Fukuyama, F., (2013). “What is Governance?”, Governance, 26(3), pp. 347-368.

Gani, A., (2011). “Governance and Growth in Developing Countries”, Journal of Economic Issues, 45(1), pp. 19-40.

Ghosh, J., (2013). “Towards a Policy Framework for Reducing Inequalities”, Development, 56(2), pp. 218-222.

Greenaway-McGrevy, R., Han, C., & Sul, D., (2012). “Asymptotic distribution of factor aug- mented estimators for panel regression”. Journal of Econometrics, 169 (1), pp. 48-53.

Gyimah-Brempong, K., & Racine, J. S. (2014). “Aid and Economic Growth: A Robust Approach”, Journal of African Development, 16(1), pp. 1-35.

Kangoye, T., (2013). “Does Aid Unpredictability Weaken Governance? Evidence From Developing Countries”, The Developing Economies, 51(2), pp. 121-144.

Kargbo, P. M., & Sen, K., (2014). “Aid Categories that Foster Pro-Poor Growth: The Case of Sierra Leone”, African Development Review, 26(2), pp. 416-429.

Kaufmann, D., Kraay, A., & Mastruzzi, M., (2007a). “Growth and Governance: A Reply”, Journal of Politics, 69(2), pp. 555-562.

Kaufmann, D., Kraay, A., & Mastruzzi, M., (2007b). “Growth and Governance: A Rejoinder”, Journal of Politics, 69(2), pp. 570-572.

Kaufmann, D., Kraay, A & Mastruzzi, M., (2010). “The worldwide governance indicators: Methodology and analytical Issues”. World Bank Policy Research Working Paper No 5430, Washington.

Khandelwal, P., & Roitman, A., (2012). “The Economics of Political Transitions: Implications for the Arab Spring”, IMF Working Paper No. 13/69.

Kindiki, M. M., (2011). “International Regime Governance and Apparel Labour Upgrading in Export Processing Zones in Urban Kenya”, African Review of Economics and Finance, 3(1), pp. 26-40.

Krause, U., (2013). “Innovation: The new Big Push or the Post-Development alternative?”, Development, 56(2), pp. 223-226.

Kurtz, M., & Schrank, A., (2007a). “Growth and Governance: Models, Measures, and Mechanisms”, Journal of Politics, 69(2), pp. 538-554.

Kurtz, M., & Schrank, A., (2007b). “Growth and Governance: A Defense”, Journal of Politics, 69(2), pp. 563-569.

Lalountas, D.A., Manolas, G.A., & Vavouras, I.S., (2011), “ Corruption, globalization and development: How are these three phenomena related?”, Journal of Policy Modeling, 33, pp.636-648.

Lemma, S., (2014), “African philanthropy: the new drivers of development”, The Guardian, http://www.theguardian.com/global-development-professionals-network/2014/may/07/africadiaspora-philanthropy-development (Accessed: 03/06/2014).

Lensink, R., & Morrissey, O., (2000). “Aid instability as a measure of uncertainty and the positive impact of aid on growth,” The Journal of Development Studies, 36(3), pp. 31-49.

Mahon, J. (2004) Causes of tax reform in Latin America, 1977–95. Latin American Research Review, 39(1), pp. 3–30.

Mahon, J. (2005) Liberal states and fiscal contracts: aspects of the political economy of public finance. Paper presented at the annual meeting of the American Political Science Association, Marriott Wardman Park, Omni Shoreham, Washington Hilton, Washington, DC, Sep 01, 2005 <Not Available>. 2013-1217http://citation.allacademic.com/meta/p40115_index.html

Marglin, S. A. (2013). “Premises for a New Economy”, Development, 56(2), pp. 149-154.

McKenzie C, R., & McAleer M (1997). “On efficient estimation and correct inference in models with generated regressors: A general approach." Japanese Economic Review, 48(4), pp. 368-389.

Monni, S., & Spaventa, A., (2013). “Beyond GDP and HDI: Shifting the focus from paradigms to politics”, Development, 56(2), pp. 227-231.

Moore, M. (2008) Between coercion and contract, in: D. Brautigam, O.H. Fjeldstad and M. Moore (eds) Taxation and State-building in Developing Countries (New York: Cambridge University Press), pp. 34–63.

Morton, J., (1994) The Poverty of Nations: The Aid Dilemma at the Heart of Africa (London: British Academic Press).

Moyo, D. (2009). Dead Aid: Why Aid Is Not Working and How There is Another Way for Africa. New York: Farrar, Straus and Giroux.

Ndlovu-Gatsheni, S. J. (2013). “The Entrapment of African within the Global Colonial Matrices of Power: Eurocentrism, Coloniality and Deimperialieation in the Twenty-first century”, Journal of Developing Societies, 29(4), pp. 331-353.

Obeng-Odoom, F. (2013). “Africa’s Failed Economic Development Trajectory: A Critique”, African Review of Economics and Finance, 4(2), pp. 151-175.

Oluwatobi, S., Efobi, U.R., Olurinola, O.I., Alege, P. (2015), “Innovation in Africa: Why Institutions Matter”, South African Journal of Economics, 83(3), pp. 390-410.

Oxley L, & McAleer, M., (1993). “Econometric issues in macroeconomic models with generated regressors.” Journal of Economic Surveys, 7(1), pp. 1-40.

Pagan, A., (1984). “Econometric issues in the analysis of regressions with generated regressors”, International Economic Review, 25(1), pp. 221-247.

Pesaran, M. H., (2006). “Estimation and inference in large heterogeneous panels with a mul- tifactor error structure”. Econometrica, 74 (4), pp. 967-1012.

Prichard, W. (2009) “The politics of taxation and implications for accountability in Ghana 1981–2008”. IDS Working Paper No. 330.

Stock, J. H. & M. W. Watson (2002). “Forecasting using principal components from a large number of predictors”. Journal of the American Statistical Association, 97 (460), pp.1167-1179.

Stoddard, E. (2014, February). “Somaliland blessed by dodging aid ‘curse’: minister”, Reuters (South Africa), http://mobile.reuters.com/article/idUSBREA1316Y20140204?irpc=932 (Accessed: 23/02/2014).

Titumir, R. A. M., & Kamal, M. (2013). “Growing Together Sustainably: A zero-poverty post 2015 development framework”, Development, 56(2), pp. 172-184.

Tusalem, R. F., (2015), “State Regulation of Religion and the Quality of Governance”, Politics & Policy, 43(1), pp. 94-141.

Van de Walle, N., (2001). African economies and the politics of permanent crisis, 1979-1999. New York: Cambridge University Press.

Wamboye, E., Adekola, A., & Sergi, B. S. (2013). “Economic Growth and the Role of Foreign Aid in Selected African Countries”, Development, 56(2), pp. 155-171.

Westerlund, J., & Urbain, J-P., (2013a). “On the estimation and inference in factor-augmented panel regressions with correlated loadings”, Economic Letters, 119, pp. 247-250.

Westerlund, J., & Urbain, J-P., (2013b). “On the implementation and use of factor-augmented regressions in panel data”, Journal of Asian Economics, 28, pp. 3-11.

Westerlund, J., & Urbain, J-P., (2012). “Cross-sectional averages versus principal components”, Maastricht University, RM/11/053, Maastritcht.

Yerrabati, S., & Hawkes, D., (2015). “Economic Governance and Economic Growth in South and East Asia & Pacific Region: Evidence from Systematic Literature Reviews and Meta-analysis”. Advances in Economics and Business, 3 , pp. 1 - 21.