Heterogeneity in the allocation of external public financing: evidence from post-MDRI countries

Abstract

This article revisits the evidence on the allocation of external public financing to post-MDRI countries while controlling for heterogeneity across recipient economies through quantile regressions. The results show that donors were more selective in terms of institutional quality when allocating aid to countries with the highest income per capita in the sample.

Keywords:

• external public financing
• selectivity
• debt relief
• quantile method
• Sub-Saharan Africa

JEL Classification:

• P45
• O11
• O55

Acknowledgements

The authors would like to thank Martine Guerguil and Herve Joly for their helpful comments.

Notes

¹See Claessens et al. (2007) for a comprehensive review of aid allocation literature.

²The 18 countries in the analysis are Benin, Burkina Faso, Cameroon, Ethiopia, The Gambia, Ghana, Madagascar, Malawi, Mali, Mozambique, Niger, Rwanda, São Tomé y Príncipe, Senegal, Sierra Leone, Tanzania, Uganda and Zambia. These countries share common economic and institutional features such as relatively low economic diversification and limited access to international capital markets.

The views expressed herein are those of the author and should not be attributed to the IMF or the World Bank, their Executive Boards, or their managements.

³ This OLS model is an alternative to panel estimations using fixed or random effects models. The random effects model is based on the assumption that the explanatory variables are not correlated with individual specific effects. However, such a model may not be appropriate since some historic factors have been found to be important determinants of countries' current institutions and governance quality. The fixed effects model controls for all invariant factors such as colonial ties. However, given the relatively short time span of the analysis (2001–2007), it would be difficult to identify the effect of structural factors with low variability such as governance quality. Changes in real GDP per capita would also be relatively limited over 6 years.

⁴ SEs and confidence intervals of the coefficients obtained with the quantile regressions can be estimated by asymptotic methods or by bootstrapping. Results obtained with these two methods are robust (Koenker and Hallock, 2001), with the bootstrap method being the more practical one.

⁵ The relatively small and homogeneous sample limits, to some extent, the scope of the quantile analysis than in a broader sample of countries.

⁶ The marginal effects are obtained after controlling for other determinants of public external flows as in the previous regressions.