The costs of favoritism: Is politically-driven aid less effective?

1. The costs of favoritism:Is politically-driven aid less effective? Axel Dreher (Georg-August University Göttingen, KOF, CESifo, IZA) Stephan Klasen (Georg-August University Göttingen) James Raymond Vreeland (Georgetown University) Eric Werker (Harvard Business School) Presentation by James Raymond Vreeland For The Political Economy Seminar Series at Princeton University October 26, 2009

2. Work in progress: Since the draft… • Newtheory! • Newdata! • Newresults! • Even a New co-author! • All of this for just the price of an Amtrak ticket from Washington, DC!

3. The plan: • The question • The debate • The approach • The analysis • Conclusion

4. The question: • Is politically motivated aid less effective?

5. The debate: • Critics argue aid (e.g., World Bank lending) has failed (e.g., Easterly) • Some say the problem is politics (e.g., Stone) • Others argue political motivations have faded (e.g., Bermeo) • Still others say that multi-lateral sources are less influenced by politics (e.g., Tobin)

6. Do international politics matter for lending? World Bank, FAQ, www.worldbank.org • “It is true that during the Cold War years aid was politically motivated. • “Now however aid is being delivered to countries most in need, • “and to those who show they are determined to use it well.”

7. avg=1.29 avg=2.13 avg=1.29 avg=2.06 avg=2.19 avg=1.28 avg=2.15 avg=1.30 avg=2.10 std=1.95 std=2.93 std=1.95 std=2.75 std=3.11 std=1.96 std=2.96 std=1.93 std=2.92 n=5333 n=357 n=5333 n=176 n=181 n=2638 n=183 n=2695 n=174 Non- Member Non- 1st.year 2nd year Non- Member Non- Member member member member member member member Total sample Over time During the cold war After the cold war World Bank projects & UNSC membership 2.5 2.0 1.5 1.0 0.5 0.0 Source: Dreher, Sturm, Vreeland (2008)

8. So politics are important… • … but so what? • Are there any costs of this favoritism?

9. The approach: • Dependent variable: • World Bank project evaluations • Better than other outcome variables (e.g., economic growth) – less noisy • Independent (Independent Evaluation Group/Operations Evaluation Department) • Independent variables: • (Elected) United Nation Security Council Membership • “Seat” on the World Bank Executive Board

10. The data analysis

11. Data on World Bank project quality • World Bank’s Independent Evaluation Group (2009): • Discrete performance measure generated by World Bank project managers and evaluators • 8,405 projects from 152 countries • First project approved in 1956, last in 2006 • First project ends in 1964, last in 2007 • Average project takes 6 years, longest 22 years • 73% of the projects rated “satisfactory” (27% “unsatisfactory”)

12. Empirical setup • Model: Logit (with fixed effects) • Dependent variable: indicator for successful evaluation • Project-level panel: 1975-2003 • Control variables follow Dollar & Svensson (2000) • time in office & squared term • ethnic fractionalization & squared term • “instability” • democracy

13. Satisfactory Project Evaluation, Logit

14. Satisfactory Project Evaluation, Logit (t-stats in parentheses)

15. Accounting for the Cold War (Bermeo 2008)

16. Satisfactory Project Evaluation, Logit, Cold War period

17. Satisfactory Project Evaluation, Logit, Cold War period

18. Satisfactory Project Evaluation, Logit, Post-Cold War period

19. Satisfactory Project Evaluation, Logit, Post-Cold War period

20. Accounting for “vulnerability” (Stone, 2008) • Strategic interests only matter if financing is a high priority for the borrower • From a borrower’s perspective, influence is a valuable resource, used only when the stakes are high "The effects of the borrower’s strategic importance should be conditional on the borrower’s external vulnerability" • Stone suggests: • Short-term debt • Debt service

21. Table 5: Satisfactory Project Evaluation, Interaction with vulnerability

24. Summary • UNSC membership reduces the probability of successful evaluation by about 0.11 during the Cold War period • With extreme short-term debt (around 40 short-term/total), UNSC membership reduces the probability of a satisfactory evaluation by about 0.2 (whole period) • With debt service of 15% (GNI), UNSC membership reduces the probability of a satisfactory evaluation by about 0.2 (whole period) • Otherwise, no effects • UNSC membership during post-Cold War not facing extenuating circumstances • World Bank Executive Board membership • Conclusion: • The World Bank may be doing a good job administering political aid in all but the most challenging circumstances

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