An economic analysis of overseas aid motivations : theory and empirical results for Australia

Gounder, Rukmani. (1994). An economic analysis of overseas aid motivations : theory and empirical results for Australia PhD Thesis, School of Economics, The University of Queensland.

       
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Author Gounder, Rukmani.
Thesis Title An economic analysis of overseas aid motivations : theory and empirical results for Australia
School, Centre or Institute School of Economics
Institution The University of Queensland
Publication date 1994
Thesis type PhD Thesis
Total pages 283
Language eng
Subjects 14 Economics
Formatted abstract The purpose of this thesis is to examine the motivations that underlie the inter-country allocation of Australian bilateral aid to developing countries.

It is important to put bilateral aid in perspective. Chapter 1 provides an historical perspective on the evolution of aid, and gives an answer to the question, "Why did overseas aid programs come into existence in the post-World War II period?" Chapter 2 provides an eclectic survey of the economic literature on aid, so as to place this study in a broader perspective. Chapter 3 is descriptive in nature: using published time series data, material is presented which indicates the relative size of Australian Official Development Assistance (ODA). In addition, it is argued that it is important to consider long term commitments in empirical analysis.

Chapter 4 makes an empirical contribution to knowledge on aid. The following question is addressed: "Did the Australian International Development Assistance Bureau implement the Jackson Report's recommendation to concentrate Australian ODA on countries in South-East Asia and the South Pacific, as well as small nation states in the Indian Ocean?" The results indicate that the post-Jackson regional allocation of Australian bilateral aid is statistically different from the pre-Jackson regional distribution of bilateral aid.

Chapter 5 continues the analysis of regional allocations of bilateral ODA. The empirical contribution in this Chapter involves the estimation of regression equations to time series data on per capita bilateral ODA to various countries. The conclusion is that there are long-standing, significant differences in per capita bilateral ODA to particular countries and/or regions. This result is important for subsequent analysis in the thesis as it indicates that Australia has a regional policy, and some special policies (particularly involving Papua New Guinea), which will need to be modelled in subsequent econometric analyses.

Chapter 6 begins with an account of the existing economic literature of aid motivation models. Generally, the literature postulates two models, universally referred to as the recipient need (RN) model and the donor interest (DI) model. The Chapter involves a theoretical contribution in that it argues that the existing literature is somewhat deficient in that a third model, called "the humanitarianism model", is also relevant. This model is derived from a consideration of certain propositions in conventional welfare economics, using the concept of an interdependent utility function. Two testable propositions are derived from this theoretical framework. Three measures of "the standard of living" are employed for making inter-country comparisons in the empirical analysis. The results of Chapter 5, that there are both regional and special policies operative in Australia's bilateral program, when incorporated into the regression analysis, markedly improve the empirical results. Thus the conclusion is that the inter-country allocation of Australian bilateral aid is subject to multiple policies: the humanitarianism model cannot explain the allocation of bilateral aid. This conclusion holds for all three measures of living levels.

Chapters 7,8,9, and 10 make empirical contributions to knowledge. The analysis in Chapter 7 is concerned with estimating the RN and DI models on Australian bilateral ODA data. All three measures of living levels are again employed. On conventional goodness-of-fit criteria, it is found that both models fit the data. This is an a-typical result in that previous studies, of major nation states, found support for the DI model but not the RN model. This conclusion holds irrespective of which measure of living levels is employed for all the nine years for which the equations are estimated, as well as for a pooled equation. That both models fit the data requires that further econometric tests be undertaken on the equations.

Chapter 8 begins with a survey of the (new) econometric literature on tests of non-nested hypotheses. It is shown that the RN and DI models are, in fact, non-nested. The Chapter concludes by reporting the results of three non-nested tests on the equations. The results indicate that in one year the RN model dominates, in two years the DI model dominates, and in three other years the results are inconclusive.

Chapter 9 reports the results of undertaking further sensitivity analysis. Previous chapters have employed per capita ODA as the dependent variable. This Chapter recalculates the RN and DI models using absolute ODA as the dependent variable. This sensitivity analysis is necessary as there is no unanimity in the literature as to the appropriate dependent variable. This absence of unanimity is explicable when it is recognised that the economic models formulated of inter-country aid allocations are imperfect in that the decision making process is inherently political in nature. The econometric results again indicate that both the RN and DI models fit the data, however the non-nested tests produce inconclusive results for all six years for which the equations are estimated.

Thus this study finds some support for the RN model and some support for the DI model, in some years with per capita aid as the dependent variable. In other years the results are indeterminant. These indeterminant results indicate that the RN and DI models are insufficient to explain the aid allocation process. This indicates the need either for better models or better data. With absolute aid as the dependent variable this study shows that in all years the results are indeterminant. However a comprehensive model, including both RN and DI explanatory variables always performs well in an absolute form. This provides some support for the view that both RN and DI concerns enter the allocation process.

The thesis concludes (Chapter 10) by addressing, in detail, two (so-called) aid bias issues. These are "the population bias" and "the middle-income bias". These issues are addressed taking both per capita and absolute ODA as the dependent variable. It is found that, in the equations using per capita bilateral ODA as the dependent variable, there is no evidence of a middle-income bias in the allocation of Australia's bilateral aid. With respect to the population bias, the results provide some support for the view that Australian bilateral aid discriminates against the more populous countries in some years. The results obtained using absolute aid as the dependent variable indicate that there is no evidence of a middle-income bias or a population bias. This conclusion holds for all the six years analysed.

Keyword Economic assistance, Australian.

 
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