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 Social Infrastructure: Sectoral Distribution of Aid Flows 1970-2010 Education en Health 1000 Population 900 Water supply and Sanitation Constant 2013 USD million Government and civil society 800 Other 700 (DAC Deflator) Production Sectors: 600 Agriculture 500 Industry, mining and construction Trade and turism 400 300 Economic Infrastructure: 200 Transport and communication Energy 100 Other 0 Economic Infrastructure & Services Production Sectors Social Infrastructure & Services Multi-Sector / Cross-Cutting The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 2
UNU-WIDER 30TH ANIVERSARY CONFERENCE …and the World Bank is focusing on infrastructure World Bank Group Infrastructure Commitment: en FY00 through FY12 “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 .” The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 3
UNU-WIDER 30TH ANIVERSARY CONFERENCE but is it really worth investing aid? “As a result, increased aid flows to developing countries are unlikely Average Return to Capital in Rich and Poor Countries en to have much impact on capital stocks and output, unless they are accompanied by a return to financial repression, and in particular to Calibration Method Rich Poor an effective ban on capital outflows in these countries. Even in that Countries Countries case, increased aid flows would be a move towards inefficiency, and Naïve 11.4 27.2 not increased efficiency, in the international allocation of capital .” “One can rationalize virtually all of the cross-country variation in capital per (2.7) (9.0) worker without appealing to international [Caselli and Feyrer (2007), Conclusion (p. 556).] capital-market frictions” 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) Source : Table 3 in Caselli and J. Feyrer (2007) The Marginal Product of Capital, Quarterly Journal of Economics 122(2), 535-568. The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 4
UNU-WIDER 30TH ANIVERSARY CONFERENCE This is a refinement of Mosley’s micro -macro paradox Median economic rates of return (ERR) of World Bank operations. en 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 Sector Projects Share ERR (%) RERR (%) 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 H. Income: nonOECD 7 1 16 12 reporting of rates of return includes only investment projects with both Economic Rates of Returns (ERRs) and Revised Economic Rates of Returns (RERRs) H. income: OECD 7 1 15 7 Source: Operations Evaluation Department (2003, Table 13). Low income 335 49 21 19 Lower middle income 258 38 22 20 Upper middle income 73 11 22 19 The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 5
UNU-WIDER 30TH ANIVERSARY CONFERENCE Estimating the return to aid investments There are 3 approaches to computing the aggregate marginal product • en of 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 • The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 6
UNU-WIDER 30TH ANIVERSARY CONFERENCE Estimated average return to aid investments across 94 countries en 60 40 20 0 -20 .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/ The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 7
UNU-WIDER 30TH ANIVERSARY CONFERENCE The result is quite stable across estimators 60 OLS 60 FE en 40 40 20 20 0 0 -20 -20 .5 .6 .7 .8 .9 1 .5 .6 .7 .8 .9 1 TSLS Fuller 60 60 40 40 20 20 0 0 -20 -20 .5 .6 .7 .8 .9 1 .5 .6 .7 .8 .9 1 CUGMM SeqGMM 60 60 40 40 20 20 0 0 -20 -20 .5 .6 .7 .8 .9 1 .5 .6 .7 .8 .9 1 Aid investment as share of total aid The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 8
UNU-WIDER 30TH ANIVERSARY CONFERENCE Concluding remarks The average aggregate gross rate of return on aid investments is close • en 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. The Marginal Product of Aid Capital: September 18, 2015 og ”Enhedens Slide 9
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