Lecture 12

Question 1

Definition foreign aid

Answer 1

• Definition: International transfer of goods, services, or capital from a country or
  international aid agency to a recipient country or its population

Question 2

Type of aid

Answer 2

 Humanitarian and disaster relief
 Economic aid
 Military support
 Healthcare programs

Question 3

Types of donors

Answer 3

Public Aid (Official Development Assistance) – bilateral or multilateral
 Private (NGOs, charities…)

Question 4

Altruistic reasons for giving aid

Answer 4

Compensation for past exploitation
 Counter global inequality
 Relieve disasters
 Encourage good governance/human rights/democracy… (conditional aid)

Question 5

Economic self interested reasons for giving aid

Answer 5

 Develop or expand markets for a giving country’s goods and services (e.g. tied aid)

Question 6

Political reasons for giving aid

Answer 6

 Buy influence for security reasons

Question 7

Reasons taking aid

Answer 7

Helps fund beneficial economic programs, disaster relief, better health care…
* BUT ALSO:
 Can benefit corrupt elites (remember the food for oil program in Iraq…)
 Can allow leaders to ignore what their populations want

Question 8

Fiscal bargain

Answer 8

All leaders rely on revenue to govern.
* In most societies their citizens hold wealth.
* If leaders want revenue they must bargain with citizens and agree upon a “fiscal contract”
* In exchange for taxation, the leader provides political rights and public goods.
* As demand for revenue increases, leaders must extend political rights or find other ways to
extract revenue
Simple version: Need for taxes -> leads to democracy
No need for taxes -> well… no democracy

Question 9

Aid flows as non tax revenue

Answer 9

Provides leaders an incentive to ignore tax-payers’ demands
* Provides resources to buy off political supporters with “private goods” or “public
goods”
* Works best if the group propping up government = “selectorate” is small
* Foreign Aid, Remittances (later today), Oil Rents (last class)

Question 10

Altruistic donors and recipients
expectations aid flows

Answer 10

Aid flows to poorest countries
2) Aid flows to countries with better democracy/human rights records
3) (Maybe) aid flows to former colonies to make up for past exploitation

Question 11

Economic self interested donors expectations aid flow

Answer 11

Aid flows between countries with more trade flows
2) Aid flows to countries with biggest potential consumer markets
3) Aid is largely “tied”

Question 12

Political donors
expectations aid flow

Answer 12

Aid flows to strategic and military allies
2) Aid flows to autocratic and corrupt governments (more likely to make strategic concessions in exchange)
3) (Maybe) aid flows to former colonies to maintain useful political ties

Question 13

Alesina and Dollar 2000

Answer 13

• “An inefficient, economically closed, mismanaged non-democratic former colony
  politically friendly to its former colonizer, receives more foreign aid than another
  country with similar level of poverty, a superior policy stance, but without a past as a
  colony.”
• Nordic countries more “altruistic”, give to countries with:
   Low income levels
   Good institutions and economic openness
• France gives largely to former colonies in political alliances, not sensitive to income or
  democracy
• US giving dominated by security interests in the Middle East

Question 14

Summary aid flows

Answer 14

Strategy and Political Alliances Matter:
* Foreign aid dropped off dramatically after Cold War
* Temporary members of UNSC get more aid during their terms
* Economic motives also play a role, especially in how development contracts are written
* Some altruistic motives, too (especially in Scandinavia)

Question 15

Does aid work? YES

Answer 15

Jeffrey Sachs:
Economic Development Aid Can help
countries escape the “poverty trap”
Bill Gates:
Aid related to healthcare has been
instrumental in eradicating smallpox and
fighting HIV/AIDS, tuberculosis, malaria…

Question 16

Does aid work? NO

Answer 16

William Easterly:
Too much aid goes to corrupt autocrats +
Principal-Agent Problems
Dambisa Moyo:
Aid = free money that makes political leaders
worse

Question 17

2 economic models

Answer 17

Immigration’s Effect on Wages (back to the Factor Model)
2. Fiscal Models of Competition for Public Goods

Question 18

Factor model with immigration (EXAMPLE)

Answer 18

People in the Netherlands want to consume some goods that are intensive in low-skilled labor
 E.g. T-Shirts
* Netherlands is scarce in low-skilled labor
* Without trade or immigration, T-shirt producers compete for the few low-skilled workers
 Wages for low-skilled workers are high
* How can T-shirt producers lower costs?
1. Import T-shirts from more low-skilled labor-abundant countries (free trade, maybe FDI)
2. Import more low-skilled workers into the Dutch economy (immigration)

Question 19

Trade and immigration can be substitutes

Answer 19

You can either trade with countries that have different labor endowments
* OR you become more abundant in the type of labor you are scarce in through IMMIGRATION
* In countries that are scarce in low-skilled labor, both lead to lower wages for low-skilled workers
and both increase the income of capital owners
What does that mean? In low-skilled labor-scarce countries…
* Low-skilled workers should oppose immigration by low-skilled migrants, especially when trade is
restricted
* Capital owners should lobby for more immigration when trade is restricted
* Trade and immigration should be political substitutes in labor-scarce countries

Question 20

Criticism factor model

Answer 20

• Doesn’t help us understand the EU case with free flows of trade and labor
• The bias against low-skilled immigrants should be strongest among low-skilled locals
   Survey experiments do not find this (e.g. Hainmueller and Hiscox, 2010)

Question 21

Fiscal competition model

Answer 21

• Immigration can also affect locals’ economic conditions beyond wages: Taxes and Fiscal
  Transfers
• Immigrants that work pay taxes, but they also make use of government-funded services:
  schools for their children, child benefits, the healthcare system, subsidized housing…

Question 22

Fiscal pie

Answer 22

• If immigrants are net contributors, the government can:
   Increase the pie – more people get more government services
   Keep the pie’s original size – other net contributors have to pay less tax
• If immigrants are net consumers, the government can:
   Increase the pie – recipients get same amount of services, but more tax to fund it
   Keep the pie’s original size – recipients each get a smaller slice of the pie
  What does that tell us?
  Locals should prefer immigrants who are net contributors to those who consume more government services:
• High-wage over low-wage
• High-skill over low-skill
• Those without dependents over those with dependents
  Empirical evidence is inconclusive about whether people fear higher taxes or fewer government services

Question 23

Criticisms of fiscal model

Answer 23

• In the long-run, most immigrants add to the economy through labor, consumption etc.
• For aging societies, net benefit of adding young workers is very high
• Fiscal competition cannot explain why states were closed to immigration before welfare
  states were created
• The model assumes that more public services are funded through tax hikes today (vs.
  remember, governments can borrow now, pay later)

Question 24

Cultural explanations

Answer 24

The following are strong predictors of public opposition to immigration:
 Preference for cultural homogeneity (e.g. Sides & Citrin 2007, Ivarsflaten 2005)
 Overestimating number of immigrants (e.g. Blinder 2013)
 Positively correlated with perceptions of “symbolic threat” and perceived negative economic impact of immigrants on the
country as a whole
 In experiments: culturally threatening cues (e.g. Sniderman et al. 2004)
 “Ethnocentrism” = generalized negative attitudes towards “out-groups” (e.g. Kinder & Kam 2009)
 Anti-immigrant elite and media rhetoric (e.g. Hainmueller & Hangartner 2013, Branton et al. 2011)

Question 25

Take away backlash

Answer 25

• Economic models suggest that in low-skilled labor-scarce economies, many workers stand to lose
  economically from immigration
• The factor model helps explain why capital owners/firms might lobby for more immigration
• But empirical tests of economic models’ predictions on workers’/regular voters’ attitudes are
  inconclusive
• Instead, cultural and ethnic threat + media and elite rhetoric are strong explanations for backlash
  against immigration

Question 26

What about sending states?

Answer 26

• Emigration has the opposite economic effects to
  immigration:
   May increase labor costs – good for workers, potentially bad
  for growth and competitiveness
   Depending on WHO emigrates, could erode your tax-base
  and cause “brain-drain”