External finance and aid

Question 1

Who are major players in international finance?

Answer 1

US institutional investors - $45tn

Far more than:
World Bank - $2-60bn
IMF - $1tn

Question 2

What has financial globalization brought about?

Answer 2

• sovereignty
• regulatory end-runs (accounting to move profits)
• competitive forbearance (lobbying)
• currency mismatches
• contagion

Question 3

Are remittance incomes significant in comparison to other capital flows, and are ?

Answer 3

Yes, $689bn

• exceed ODA
• have grown significantly
• still smaller than FDI
• steadier than other capital flows

Question 4

Why have remittances increased?

Answer 4

• not mainly from refugees (only 0.1-0.3% of the world)
• increased scrutiny/measurement
• lower transfer costs from innovation (e.g.. TransferWise)
• more migrants

Question 5

How do people spend remittances?

Answer 5

Yang

• uses Asian Financial Crisis as a source of exogenous variation
• children stay in school longer
• reduces child labour

Question 6

What are examples of brain gain?

Answer 6

Ghana and Cote d’Ivoire
- attitudes, social, financial and human capital

India
- partially responsible for the growth of IT

Question 7

What are examples of brain drain?

Answer 7

Healthcare workers from Africa emigrating

HOWEVER: demonstration effects
- if people see that there are increased returns to education abroad, may increase investment in education locally

Question 8

What are the major early criticism of aid flows?

Answer 8

Bauer/Easterly

• potential dependency
• agency and sovereignty
• weapon of ideology
• irresponsible consumption
• corruption

Question 9

What was a potential solution to aid criticism, and did it work?

Answer 9

Conditionality, and no

Kanbur shows that there’s no evidence that conditionality resulted in more productive spending, due to FUNGIBILITY
- aid just substitutes spending toward other non-productive activities, even if conditions are met

Question 10

What was the Dollar/World Bank view on aid?

Answer 10

• evidence that aid works when interacting with good policy
• but the poorest people are in places where policy is poor
• and it might be due to institutions, not policy
• not convincing

Question 11

What is Easterly’s modern critique on aid flows?

Answer 11

Cartel of good intentions

• aid agencies are incentivized to paper over cracks
• unable to learn from mistakes
• burdening developing countries with admin

Question 12

What does the modern evidence suggest?

Answer 12

Galiani et al

• use arbitrary threshold as a quasi-experiment
• overcomes endogeneity issue
• aid has a statistically significant impact on growth