The Marginal Product of Aid Capital Henrik Hansen Development - - PowerPoint PPT Presentation

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The Marginal Product of Aid Capital Henrik Hansen Development - - PowerPoint PPT Presentation

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The Marginal Product of Aid Capital Henrik Hansen Development Economics Research Group (DERG) University of Copenhagen og Enhedens UNU-WIDER 30TH ANIVERSARY CONFERENCE Aid is still used for investment, although the share is declining

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The Marginal Product of Aid Capital

Henrik Hansen Development Economics Research Group (DERG) University of Copenhagen

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Aid is still used for investment, although the share is declining

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 2

100 200 300 400 500 600 700 800 900 1000 Constant 2013 USD million (DAC Deflator)

Sectoral Distribution of Aid Flows 1970-2010

Economic Infrastructure & Services Production Sectors Social Infrastructure & Services Multi-Sector / Cross-Cutting Economic Infrastructure: Transport and communication Energy Other Production Sectors: Agriculture Industry, mining and construction Trade and turism Social Infrastructure: Education Health Population Water supply and Sanitation Government and civil society Other

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…and the World Bank is focusing on infrastructure

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 3

“Infrastructure is now the single largest business line of the World Bank Group: It represents 43 percent of the total assistance of the Group to low- and middle-income countries and the private sector.” World Bank Group Infrastructure Commitment: FY00 through FY12

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but is it really worth investing aid?

Calibration Method Rich Countries Poor Countries Naïve 11.4 27.2 (2.7) (9.0) Correction for Natural Capital 7.5 11.9 (1.7) (6.9) Correction for price differences 12.6 15.7 (2.5) (5.5) Correction for both 8.4 6.9 (1.9) (3.7)

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 4

Average Return to Capital in Rich and Poor Countries

Source: Table 3 in Caselli and J. Feyrer (2007) The Marginal Product of Capital, Quarterly Journal of Economics 122(2), 535-568.

“One can rationalize virtually all of the cross-country variation in capital per worker without appealing to international capital-market frictions” “As a result, increased aid flows to developing countries are unlikely to have much impact on capital stocks and output, unless they are accompanied by a return to financial repression, and in particular to an effective ban on capital outflows in these countries. Even in that case, increased aid flows would be a move towards inefficiency, and not increased efficiency, in the international allocation of capital.” [Caselli and Feyrer (2007), Conclusion (p. 556).]

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Note: The data are for Fiscal Year 1994-2003 exits. They represent a partial lending sample (130 out of 293) and reflect all Operations Evaluation Department (OED) project evaluations through December 31, 2003. Figures exclude projects not rated. OED reporting of rates of return includes only investment projects with both Economic Rates of Returns (ERRs) and Revised Economic Rates of Returns (RERRs) Source: Operations Evaluation Department (2003, Table 13).

Sector Projects Share (%) ERR (%) RERR (%)

  • H. Income: nonOECD

7 1 16 12

  • H. income: OECD

7 1 15 7 Low income 335 49 21 19 Lower middle income 258 38 22 20 Upper middle income 73 11 22 19

This is a refinement of Mosley’s micro-macro paradox

Sector Projects (#) Share (%) ERR (%) RERR (%) Energy and Mining 168 25 18 16 Environment 13 2 17 17

  • Comm. Technology

27 4 26 25 Rural Sector 208 31 21 18 Transport 165 24 30 29 Urban Development 40 6 20 17 Water and Sanitation 59 9 13 10

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 5

Median economic rates of return (ERR) of World Bank operations.

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Estimating the return to aid investments

  • There are 3 approaches to computing the aggregate marginal product
  • f capital
  • 1. Cross country comparison of interest rates
  • 2. Regression of GDP growth on changes in capital (investment)
  • 3. Calibration from national accounts statistics and other data
  • Caselli and Feyrer calibrate the marginal product in a quite simple

and straightforward way assuming the marginal product equals the rate of return on capital in each country

  • We start from a standard growth accounting formulation but we

allow aid capital to be different from domestic capital, thus letting the marginal products of aid capital and domestic capital differ

  • and we estimate the average returns instead of calibrating them

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 6

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Estimated average return to aid investments across 94 countries

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 7

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20 40 60 .5 .6 .7 .8 .9 1 Aid investment as share of total aid

Source: Dalgaard and Hansen (2015) The return to foreign aid, WP/2015/053

http://www.wider.unu.edu/publications/working-papers/2015/en_GB/wp2015-053/

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The result is quite stable across estimators

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 8

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20 40 60 .5 .6 .7 .8 .9 1

OLS

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20 40 60 .5 .6 .7 .8 .9 1

FE

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TSLS

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Fuller

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CUGMM

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20 40 60 .5 .6 .7 .8 .9 1

SeqGMM

Aid investment as share of total aid

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Concluding remarks

  • The average aggregate gross rate of return on aid investments is close

to 20 percent.

  • This is in accord with median World Bank project level estimates.
  • If aid is invested in projects for which international private capital flows

cannot generate equal returns across developed and developing countries, and government borrowing on the international commercial bank market is restricted, the result need not contradict the finding of Caselli and Feyrer.

  • The marginal productivity of aid investment can be high in countries

with low marginal productivity of private capital

  • Hence, computing overall marginal returns on capital from national

accounts data has limited information about the productivity of aid investments.

  • Our results are in accord with the findings for aid and FDI in Selaya

and Sunesen: Does Foreign Aid Increase Foreign Direct Investment? World Development Vol. 40, No. 11, pp. 2155–2176, 2012.

UNU-WIDER 30TH ANIVERSARY CONFERENCE

The Marginal Product of Aid Capital: September 18, 2015 Slide 9

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Thank you very much!