Academic Research
Publications
The Elusive Quest for Additionality (with Nicolas Van de Sijpe and Raphael Calel ) World Development, Volume 141, May 2021
Development finance institutions (DFIs) annually invest $90 billion to support under-financed projects across the world. Although these government-backed institutions are often asked to show that their investments are “additional” to what private investors would have financed, it is rarely clear what evidence is needed to answer this request. This paper demonstrates, through a series of simulations, that the nature of DFIs’ operations creates systematic biases in how a range of estimators assess additionality. Recognizing that rigorous quantitative evidence of additionality may continue to elude us, we discuss the value of qualitative evidence, and propose a probabilistic approach to evaluating additionality. [World Development] [2019 Working Paper]
Aid econometrics: Lessons from a stochastic growth model. Journal of International Money and Finance. Volume 77, October 2017
This paper evaluates the standard empirical methods employed in the study of foreign aid, when the data generating process is a calibrated stochastic growth model in which aid recipients make optimal investment and consumption decisions. When recipients receive a stochastic flow of aid and wish to smooth consumption, standard methods fail to distinguish between the response to transient and permanent aid shocks, and hence yield misleading results concerning the object of interest to policy makers: the long-run impact of aid. [Journal of International Money and Finance] [Bristol Econ discussion paper]
Virtuous Circles and the Case for Aid (with Jonathan Temple) - IMF Economic Review, Volume 65, Issue 2, June 2017
It is sometimes argued that foreign aid leads to a virtuous circle in which growth becomes self-reinforcing. We study two versions of this argument, using a modified neoclassical growth model in which the effects of parameter changes and capital accumulation are amplified. Simulations are used to quantify the welfare benefits from aid transfers. We find that, contrary to expectations, amplification makes only a modest difference to the welfare benefits from aid. This is true even when aid allows a faster exit from a vicious circle or poverty trap. [IMF Economic Review] [CEPR discussion paper] [Bristol Econ discussion paper]
Dynamic Aid Allocation (with Jonathan Temple and Fabien Postel-Vinay). Journal of International Economics Volume 95, Issue 2, March 2015
This paper introduces a framework for studying the optimal dynamic allocation of foreign aid amongst multiple recipients. We pose the problem as one of weighted global welfare maximization. A donor in the North chooses an optimal path for international transfers, anticipating that consumption and investment decisions will be made by optimizing households in the South, and accounting for limits in the extent to which recipients can effectively absorb aid. We present quantitative results on optimal aid policy by applying our approach to a neoclassical growth model, where the scope for aid-funded growth is determined by the recipients’ distance from steady-state. [Journal of International Economics] [Working Paper]
Aid Allocation Rules. European Economic Review, Volume 71, October 2014
This paper studies an aid allocation rule used by major development agencies, and investigates optimal allocations when recipients are neoclassical economies undergoing transition dynamics. When recipients face aid absorption constraints, allocations that favor poorer recipients are not always optimal, contrary to what is assumed in assessments of donor performance. The most quantitatively significant determinants of the optimal sensitivity to recipient characteristics are the generosity of the aid budget and the extent of absorption constraints. In neoclassical recipients aid can only accelerate growth where there is already growth, so the optimal rule places little weight on growth and optimality is largely a matter of balancing recipient need against absorption constraints. [European Economic Review] [Working Paper]
Does Foreign Aid Displace Domestic Taxation?
The existence of a negative relationship between aid and taxation would have far-reaching implications for international development agencies. This paper applies some recent methodological advances to the question and also discusses a range of problems with existing research. Previous results, which tend to show a negative relationship, are often based on econometric methods that rest on potentially restrictive assumptions. When more general methods, Panel Time Series estimators and the Group Fixed Effects estimator, are applied, there is little evidence that aid displaces domestic taxation. Journal of Globalization and Development Vol 4 Issue 1 (2013) [Working Paper]
Abandoned Working Papers
Are taxes good for your health? (with Alex Cobham). UNUWIDER Working Paper 171/2016
The global framework for financing development, adopted in 2015, places great emphasis on mobilizing domestic resources to finance the Sustainable Development Goals, which include universal healthcare. In a recent paper Reeves et al. (2015) attribute progress towards universal healthcare to higher levels of taxation, but report a negative association between taxes on goods and services (indirect taxes) and health outcomes, which they hypothesise arises from the impact such taxes have on the real incomes of the poor. This paper revisits the relationship between tax types and health outcomes using the ICTD Government Revenue Dataset, which, crucially, isolates taxes from resource industries. As expected, we confirm increases in revenue are associated with increased public health expenditure; we find some weak evidence that greater reliance on direct taxes is associated with higher health spending and better outcomes, but no evidence that indirect taxes are deleterious to health. We argue these relationships cannot bear the weight of causal interpretation but that they offer some guidance on what to expect from increased domestic revenue mobilization.
For many developing countries, international transfers are now a significant source of income. These transfers include official development aid, private charitable donations, and personal remittances. This paper uses dynamic one-sector and multi-sector models to isolate conditions under which transfers could promote growth and structural transformation. Although transfers bring welfare benefits, the effects on investment and growth are modest under isoelastic utility; where investment is profitable, it would be undertaken even in the absence of transfers. Larger effects on growth and sectoral structure emerge when preferences take the Stone-Geary form, since then low investment can co-exist with high returns to investment.