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1. Aid Allocation and Aid Effectiveness: An Empirical Analysis

Author:
George Mavrotas and Alessia Isopi
Publication Date:
01-2006
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper performs aid allocation analysis using OECD-DAC data covering 20 aid donors and 176 recipients over the period 1980-2003. We improve upon earlier work in this area by employing inter alia the variable 'past outcome' measuring aid effectiveness in order to link together aid allocation and aid effectiveness. In line with previous work, we also account for both altruistic and selfish donor motives in the empirical analysis. As expected, empirical results based on To bit estimates of aid allocation for individual donors vary quite significantly among donors. We also test the robustness of our results by estimating individual regressions for the major donors over the period 1990-2003 in view of major events in the aid arena during that time that could potentially have an impact on the aid allocation process. Our results seem to be similar to those derived over the 1980-2003 period, thus implying that this was not the case. Overall, both altruistic and selfish donor motives seem to motivate aid allocation for most donors over the two periods under examination. However, when we further restrict our time dimension to the 1999-2003 period, some important policy changes with regard to selectivity seem to emerge for a small group of donor countries.
Topic:
International Relations, Development, Economics, and Humanitarian Aid

2. On the Empirics of Aid and Growth: A Fresh Look

Author:
George Mavrotas and Jan-Erik Antipin
Publication Date:
01-2006
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper contributes to the empirics of aid and growth by taking a fresh look at the aid-policies-growth nexus emanating from the very influential but also debatable paper on the subject by Burnside and Dollar: 'Aid, Policies and Growth'. We employ three different datasets (including the one used in the Burnside and Dollar paper) and Bayesian instrumental variable methods to test the robustness of the central finding of the Burnside and Dollar paper related to the aid and policy interaction coefficient. In doing so, we applied Bayesian instrumental variable technique s to find the most probable parameter values in the growth equation. We also test for the exogeneity of the instrumental variables used. We find that the marginal effect of the disputed (Aid/GDP) x Policy variable on real per capita GDP growth is substantially smaller than in Burnside and Dollar, thus casting serious doubts on the robustness of their findings, and most importantly, on the validity of the policy lessons emerged from the Burnside- Dollar study.
Topic:
Development, Economics, and Humanitarian Aid

3. The Poverty Macroeconomic Policy Nexus: Some Short-run Analytics

Author:
George Mavrotas and S. Mansoob Murshed
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The present paper utilises a short-run theoretical macroeconomic model of a small open economy to look at the impact of macroeconomic policies and financial deepening upon poverty through sectoral changes. This is because an expansion in certain sectors may cause greater poverty reduction. The model involves a non-traded and a traded sector on the formal side of the economy. The former is more capital intensive and the latter more unskilled labour intensive. Increased employment in the traded sector is more pro-poor compared to a similar rise in the non-traded sector as the former draws workers out of poverty in the informal sector. The model in our paper analyses short-run effects of devaluation, a rise in the money supply induced by financial deepening, and taxation to discourage non-traded goods consumption. Financial deepening can induce greater output and reduce poverty. Other results are mixed and taxonomic. We also attempt to differentiate between the stylised experiences of East Asia and Latin America. East Asian economies have relied more heavily on labour-intensive manufactured exports, whereas Latin America has had a relatively greater share of capital intensive and natural resource based exports. In recent decades countries in these two regions have had differing experiences in poverty reduction, with poverty arguably declining more in East Asia.
Topic:
International Relations, Development, Economics, and Poverty
Political Geography:
East Asia and Latin America

4. Education, Financial Institutions, Inflation and Growth

Author:
Iftekhar Hasan, Leonardo Becchetti, and George Mavrotas
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Our paper investigates the unexplored impact of education on inflation and of this relationship on economic growth. By using a sample of 102 countries observed on non-overlapping five-year data spells over the period 1963-2001, we find that average schooling years of the working population have a significant negative impact on inflation rates after controlling for the effects of the stance of domestic monetary policy. We also show that the negative impact of inflation on growth in conditional convergence estimates is significantly increased when the former is instrumented by educational variables. Our findings outline a third potential role of human capital on conditional convergence. They show that education is not only a production factor or a variable which may reduce demographic pressures, but also an important antidote against inflationary pressures which, in turn, negatively affect economic growth and conditional convergence. We interpret our findings by identifying three potential rationales for the education-inflation nexus: (i) education raises consumers' awareness of their power in contrasting producers' inflationary pressures; (ii) more educated individuals have lower inflationary expectations when they are also wealthier and their consumption bundle is relatively less (more) intensive in inferior (superior) goods with higher (lower) inflation potential; (iii) more (less) educated and wealthier (less wealthy) individuals tend to be net creditors (debtors) in their maturity, thereby contributing to increase (reduce) the power of anti-inflationary lobbies.
Topic:
International Relations, Development, Economics, and Education

5. Financial Sector Development and Productivity Growth

Author:
George Mavrotas and Subal C. Kumbhakar
Publication Date:
12-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Recent years have witnessed important structural changes around the world as a result of the globalization process, the creation of new economic blocks and the liberalization of financial sector in many countries. Responding to these changes many sectors of the industrialized countries have gone through major deregulatory changes to acclimate themselves to new environments. At the same time, many countries have undertaken institutional reforms to build a market-orientated financial system in the hope that transition towards market economy will improve productivity. In the face of uncertainty resulting from changes in regulatory structure and the development of financial institutions to foster market economy, many countries may not be able to achieve their maximum growth potential. In other words, productivity growth is likely to depend on the development of financial institutions and the stage of economic development That is, a less developed country is likely to benefit more (in terms of output growth rate) from the development of financial institutions than a developed economy with well-developed financial system. In this paper we document this by using data covering 65 countries, varying substantially in term s of level of development and geographic location, and spanning the period 1960-1999. Empirical results obtained from the estimation of two different empirical models regarding the measurement of total factor productivity growth seem to confirm a priori expectations about the overall positive influence of financial systems on productivity in line with previous work on this front. Our results remain robust with respect to alternative definitions of financial sector development we tried.
Topic:
Development, Economics, Globalization, and International Trade and Finance

6. Financial Sector Structure and Financial Crisis Burden: A Model Based on the Russian Default of 1998

Author:
George Mavrotas and Dmitri Vinogradov
Publication Date:
06-2005
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
We consider an overlapping generations model with two production factors and two types of agents in the presence of financial intermediation and its application to the Russian default of August 1998. The paper focuses on the analysis of the consequences of a sudden negative repayments shock on financial intermediation capacity and consequently on the economy as a whole. The model exhibits a 'chain reaction' property, when a single macroeconomic shock can lead to the exhaustion of credit resources and to the subsequent collapse of the whole banking system. To maintain the capability of the system to recover, regulatory intervention is needed even in the presence of the state guarantees on agents' deposits in the banks (workout incentives). We compare the results for an intermediated economy with those derived under the assumption of a market economy, and draw some broad conclusions on the consequences of the crises, which are contingent on the financial sector structure.
Topic:
Development, Economics, Emerging Markets, and International Trade and Finance
Political Geography:
Russia

7. Loan Processing Costs and Information Asymmetries - Implications for Financial Sector Development and Economic Growth

Author:
George Mavrotas and Salvatore Capasso
Publication Date:
12-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper presents a model in which credit-constrained firms might delay the adoption of new and more productive technologies because of the very high external financing costs they face. Our point of departure is that the efficiency of the banking system can have a profound impact on real resource and investment allocation not only directly, by reducing the amount of resources channelled to the credit market, but also indirectly by affecting entrepreneurs' investment decisions. Along these lines of reasoning we develop a model of information asymmetries in the credit market in which high costs of processing bank loan applications might obstruct investments in high-tech projects and favour, instead, low-return, self-financed investments in mature sectors. The result is that these kinds of costs have a negative impact on the average capital productivity and on the rate of economic growth. In specific circumstances, the combination of these costs and the dynamics of capital accumulation can be such that the economy incurs in a 'technology trap', in which new technologies, even if readily available, will never be adopted because of high frictions and inefficiencies in the credit market, a situation that seems to be relevant to many developing countries.
Topic:
Development, Economics, and International Trade and Finance

8. The International Finance Facility: The UK HM Treasury-DFID Proposal to Increase External Finance to Developing Countries

Author:
George Mavrotas
Publication Date:
12-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper discusses the International Finance Facility (IFF), a joint HM Treasury-DFID proposal to increase development aid substantially for the Millennium Development Goals to be achieved by 2015. The main conclusion of the paper is that the proposed IFF is a promising, forward-looking and creative proposal for it implies a substantial increase in fresh, predictable and stable aid as well as a robust financial structure. However, there are a number of concerns about potential shortcomings of the proposal, namely its underlying assumptions about continuous commitment on behalf of the donor community towards the implementation of the IFF during the life of the Facility and most importantly its heavy reliance on political coordination among donor countries participating in the proposed scheme. Potential absorptive capacity constraints in IFF aid-recipient countries may be also relevant. Achieving its huge political task as well as alleviating the crucial constraints regarding its successful implementation seem to be the main challenges this innovative proposal needs to deal with in the near future.
Topic:
Development, International Cooperation, and International Trade and Finance
Political Geography:
United Kingdom and Europe

9. Inflation, Output and Perfectly Enforceable Price Controls in Orthodox and Heterodox Stabilization Programmes

Author:
George Mavrotas and Mario Reyna-Cerecero
Publication Date:
05-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper deals with the success of price controls in stabilizing high inflation rates and their effects on the real economy under an imperfect competition setting derived by optimal maximization. Our model builds on Helpman's work of price controls and imperfect competition, and incorporates inflation inertia through adaptive expectations. The model predicts that under these circumstances price controls can be an effective method of curving inflation when they accompany an orthodox monetary restriction programme; incomes policies alone cannot curve inflation substantially. Efforts where monetary growth is decreased gradually and price controls are implemented to achieve zero inflation result in the boom-recession cycle observed in many real life programmes. When monetary growth is curved immediately and price controls are implemented to achieve zero inflation, there follows a recession and not a boom. Orthodox money-based stabilization programmes implemented on their own need more time to control inflation and always produce a recession.
Topic:
Development, Economics, and International Trade and Finance

10. Aid Disaggregation, Endogenous Aid and the Public Sector in Aid-Recipient Economies: Evidence from Côte d'Ivoire

Author:
George Mavrotas and Bazoumana Ouattara
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The present paper examines the impact of different aid types, namely project aid, programme aid, technical assistance and food aid on the fiscal sector of the aid-recipient economy by using time-series data for Côte d'Ivoire over the period 1975–99. Empirical results obtained by estimating correctly the solution of the theoretical model show that when a single value (or aggregated) for aid is used, foreign aid is fully consumed in the case of Côte d'Ivoire. However, results obtained under the assumption of aid heterogeneity clearly suggest that the government responds differently according to the nature of the aid inflows. Our approach sheds plenty of light on how the aid-recipient government reacts to different categories of foreign aid inflows and the empirical findings clearly demonstrate the importance of the aid disaggregation approach for delving deeper into aid effectiveness issues.
Topic:
Development, Economics, Emerging Markets, and Non-Governmental Organization
Political Geography:
Africa

11. Financial Sector Development — Futile or Fruitful? An Examination of the Determinants of Savings in Sri Lanka

Author:
George Mavrotas and Roger Kelly
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
This paper documents the financial and institutional developments of China during the past two decades, when China was successfully transformed from a rigid centralplanning economy to a dynamic market economy following its unique path. We empirically examine the relationship between financial development and economic growth in China by employing a panel sample covering 31 Chinese provinces during the important transition period 1986-2002. Our evidence suggests that the development of financial markets, institutions, and instruments have been robustly associated with economic growth in China.
Topic:
Development, Economics, Emerging Markets, and International Trade and Finance
Political Geography:
South Asia

12. Financial Sector Reforms and Savings Mobilization in Zambia

Author:
George Mavrotas and Samuel Manzele Maimbo
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper explores the relationship between financial sector reforms and savings mobilization in Zambia. Although there exists an extensive literature on financial sector development and savings levels in developing countries, there does not seem to exist satisfactory work on the above nexus for sub-Saharan African countries, particularly Zambia. Along these lines, the paper examines the linkages between the financial reforms of the early 1990s and savings mobilization. It considers the characteristics of banks and non-bank financial institutions, especially micro finance institutions, and savings levels and identifies problems associated with the relatively poor performance of savings in recent years and concludes with a set of policy guidelines for strengthening savings mobilization, highlighting the expected effect on povertyreducing growth.
Topic:
Development, Economics, Emerging Markets, and International Trade and Finance
Political Geography:
Africa and Nordic Nations

13. Savings and Financial Sector Development: Panel Cointegration Evidence from Africa

Author:
George Mavrotas and Roger Kelly
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
The paper uses different measures of financial sector development for a dynamic heterogeneous panel of 17 African countries to examine the impact of financial sector development on private savings. An innovative econometric methodology is also employed related to a series of cointegration tests within a panel. This is an important contribution since traditional panel data analysis adopted in previous studies suffers from serious heterogeneity bias problems. The empirical results obtained vary considerably among countries in the panel, thus highlighting the importance of using different measures of financial sector development rather than a single indicator. The evidence is rather inconclusive, although in most of the countries in the sample a positive relationship between financial sector development and private savings seems to hold. The empirical analysis also suggests that a change in government savings is offset by an opposite change in private savings in most of the countries in the panel, thus confirming the Ricardian equivalence hypothesis. Liquidity constraints do not seem to play a vital role in most of the African countries in the group, since the relevant coefficient is negative and significant in only a small group of countries
Topic:
Development, Economics, Emerging Markets, and Poverty
Political Geography:
Africa

14. The Composition of Aid and the Fiscal Sector in an Aid-Recipient Economy: A Model

Author:
George Mavrotas and Bazoumana Ouattara
Publication Date:
02-2003
Content Type:
Working Paper
Institution:
United Nations University
Abstract:
Building on recent work in the fiscal response literature, the present paper develops a new fiscal response model, which, for the first time in the relevant literature, combines the ideas of both endogenous and disaggregated aid. We endogenized aid on the grounds that the recipient government has some influence over aid disbursements. Regarding aid disaggregation, it is argued that each of the main four categories of aid, namely project aid, programme aid, technical assistance and food aid may exert different effects on the recipient economy. Furthermore, in case the preferences of the aid-recipient government are higher for some of these types of aid, neglecting aid disaggregation would lead to aggregation bias in the results and conclusions. The model adds an important new dimension to the vast aid effectiveness literature and calls for further modelling as well as empirical work in this promising research area so that significant policy implications can be derived.
Topic:
Development, Economics, Emerging Markets, Non-Governmental Organization, and Poverty