Democracy and foreign assistance in West Africa: A search for the correlation between aid and liberty (Preliminary Findings) Cameron Weber Omer Siddique New School for Social Research. Aid and Liberty in West Africa.
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Democracy and foreign assistance in West Africa: A search for the correlation between aid and liberty(Preliminary Findings)Cameron WeberOmer SiddiqueNew School for Social Research
Purpose of research is to explore aid as something external to internal political economy of recipient nation.
“Little else is requisite to carry a state to the highest degree of opulence from the lowest level of barbarism, but peace, easy taxes and a tolerable administration of justice; all the rest being brought about by the natural course of things.”
8 countries under study share common monetary policy in West Africa Monetary Union (WAMU) administered by BCEAO central bank:
Benin, Burkina Faso, Cote d’Ivoire,
Guinea-Bissau, Mali, Niger, Senegal and Togo
* Aid defined as bilateral Official Development Assistance (ODA) and Concessional Multilateral Lending (e.g. IMF, World Bank and African Development Bank)
* Data from World Bank Development Indicators, Freedom House (we are using average of political rights and civil liberties indicators) and African Elections Database
* Constant Year 2000 US Dollars
* 30 Year Period 1975-2005 (15 years of Cold War and 15 years post-Cold War)
We look at three proxies for liberty:
Regression analysis shows that for every 1% increase in aid, Freedom House indicator improves 0.03. For example if aid per person increases $1 indicator improves from 5 to 4.97.
Results show statistical significance (t-stat is 10.44 and R-Squared is .75)
It should be noted that correlation does not necessarily mean causation.
Bourguigon and Sunberg (2007), “The empirical literature on aid effectiveness has yielded unclear and ambiguous results. This is not surprising given the heterogeneity of aid motives, the limitations of the tools of analysis, and the complex causality chain linking external aid to final outcomes.”
Bourguignon, F. and Sunberg, M. 2007. “Aid Effectiveness – Opening the Black Box.” American Economic Review; Papers and Proceedings, 97(2): 316 – 321.
For reductio ad absurdum example of statistical meaning without economic meaning, would a 100% increase in aid then imply the movement of Freedom House index from 5 to 2 ?
See D. McCloskey The Rhetoric of Economics 1998 on statistical v. economic significance.
Probit regression shows $1 increase in aid increase likelihood of freely-elected leadership by 3.8%
Statistically significant with z-stat equal to 5.79 and pseudo R-Squared .1326 (note control variables not used in this regression).
increases by 1% of GDP public debt per person increases 0.4%.
Inconclusive on relationship between aid and civil and political rights due to causation question, however rights have increased historically.
Public debt and aid move together.
Aid and debt have decreased since the end of the Cold War.
Freely-elected leadership has improved since the end of the Cold War, with Cote d’Ivoire being the exception.
West Africa WAMU countries received $11 billion in aid from 1975 to 2005 and public debt per person has increased more than 600% as a percentage of the economy since 1975, while average per person income has decreased from $1247 in 1975 to $1101 in 2005.
Liberty = f(Aid; Conditional Variables)
Conditional Variables, investment as % of GDP, general government consumption as % of GDP, and trade (exports + imports) as % of GDP.
As investment increases an economy is supposed to grow and liberty increases as individual capacities increase.
As government consumption increases government may need to seek external borrowing other than aid.
As trade increases economy is supposed to grow and thus capacities (e.g. liberties) increase. However, if imports are military or other non-productive government spending then increased trade does not imply increased liberty.
Aid is statistically significant in explaining liberty index. The negative sign implies that as aid increases liberty index increases
Though it is ‘economically’ insignificant coefficients in all the equations is very low
Control variables are statistically insignificant except for trade which is marginally significant (at 10% significance level)
We have added dummy for Guinea-Bissau because Aid (% of GDP) is very high in some years. The dummy is statistically significant.
Adjusted R-Squared also increases due to inclusion of dummy.
The squared term of aid is also statistically significant and its coefficient is positive, implies decreasing and then negative returns
This together with negative sign on linear term of aid implies that at very high levels of aid liberty may decline
Debt = f(Aid; Conditional Variables)
Conditional variables are the same as in previous analysis
The impact of these variables might be inconclusive
An increase in investment may or may not lead to decrease in debt. If investment is financed by external resources, debt might increase and it may take time for this investment to realize in economic growth and hence reduction in debt
High government consumption might lead to increase in debt
Trade, if its major portion is imports, might lead to an increase in debt
An increase in aid, however, is supposed to lead in increase in debt burden
An increase in aid lead to increase in debt.
The variable is highly significant. 1% increase in aid lead to 0.40% increase in debt, which seems to be economically significant.
The coefficient decreases when dummy for Guinea-Bissau is included.
Increase in government consumption leads to an increase in debt though coefficient decrease when the dummy variable is included.
Trade’s impact on debt without dummy variable is negative and marginally statistically significant and with dummy variable is positive but insignificant.
Comments and suggestions welcome to
Cameron Weber, corresponding author.