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We’re Working on It
Krogh Seminar
Working Paper, Draft 2
Trellace Lawrimore and Reno Varghese
Abstract
Do small foreign aid donors trade money for political power in international
organizations? Large donors, like the United States, famously distribute aid for strategic
gain, but scholars often assume that small donors follow more humanitarian motives.
Focusing on Australia, this study quantitatively examines how a country’s desire for
power in international institutions compels it to give aid to countries that provide it
political support. Specifically, we consider countries that elect Australia to the Executive
Boards of the Bretton Woods Institutions—the International Monetary Fund (IMF) and
the World Bank. Using aid data from 1960 to 2009 and 186 countries, we test whether
Australia rewards member of its voting bloc with more foreign aid. Regression analyses
controlling for other aid motivations as well as country fixed-effects confirm the
hypothesis. We find that Australia, which has historically controlled powerful Executive
Directorships at the IMF and World Bank, attempts to signal a seemingly subdued
approach to international relations while quietly cultivating power in major financial
institutions.
I. Introduction
Boasting a program that “save[s] lives [and] promote[s] opportunities for all,” the
Australian Agency for International Development (AusAID) prides itself on its
humanitarian aid practices (AusAID 2012). Large donors famously distribute aid for
political gain, but scholars often assume that small donors, like Australia, follow more
humanitarian motives (Hoadley 1980, Sielaff and Skillman 2014). Yet, small donors do
2
have strategic goals, and may use aid as a part of their foreign policy toolkits.1 Focusing
on Australia, our study quantitatively examines how a country’s desire for power in
international institutions compels it to give aid to countries that provide it political
support. We assert that Australia in particular achieves regional hegemonic status in the
Bretton Woods Institutions (BWI)—the International Monetary Fund (IMF) and the
World Bank—through its strategic aid disbursal.
Existing scholarly research has not reached a consensus on Australia’s foreign aid
policy. Some find that trade is the primary motivation (Alesina and Dollar 2000, Bermeo
2012, Berthelemy 2006, Berthelemy and Tichit 2004); others argue the
importance
of
colonial legacies and regional ties (Alesina and Dollar 2000, Isopi and Mattesini 2008,
Neumayer 2003). Some even propose strictly selfish motives, whereby Australia benefits
directly from distributing food aid or technical assistance (Davis 2009; Dollery, Fleming,
and Heinecke 2008; Easterly and Williamson 2011). Still others suggest that Australia’s
aid disbursal does not reflect political motivations (Gounder 1995, Gounder 1999,
Gounder and Sen 1999, McCawley 2009). These dissonant (and in some cases, mutually
exclusive) opinions make it difficult to comprehend Australia’s foreign aid policy.
We therefore attempt to construct a more comprehensive story of Australian
foreign aid. Using aid data from 1960-2009, we analyze variables that support either the
Recipient Need (RN) model or the Donor Interest (DI) model. 2 We first rebuff the
credibility of the RN model, and then turn to Australia’s DI aid, addressing possible
strategic motivations: colonial legacy, regional ties, and bilateral trade. Importantly, we
1
We credit Secretary Madeleine Albright for the imagery of a foreign policy toolbox. Note to ourselves and
the particularly prudent Krogh students: This is actually from a book that Vreeland cites in his UNSC book.
We’re dealing with it later.
2
We credit this definition of models to McKinlay and Little, 1977.
3
introduce an innovative measure of Australia’s foreign policy interests: membership in
Australia’s BWI blocs.
Recent foreign aid literature suggests a relationship between BWI voting blocs
and foreign aid distribution. Vreeland, the first to use the BWI indicator as such,
discusses the flow of bilateral aid from Switzerland to countries in its BWI voting bloc
(Vreeland 2011). Mazumder and Vreeland then contest the claim “that middle-power
countries like Canada do not disburse foreign aid according to strategic foreign policy
objectives” through an analysis of Canadian aid disbursal to countries in its BWI blocs
(Mazumder and Vreeland 2013).
Peter Carroll specifically addresses Australia’s historical relationship with the
IMF. After his extensive analysis of Australia’s IMF bloc dynamics, he ponders, “It
would be interesting to see if the membership in the IMF by the other small island state
members of the constituency was stimulated not only by Australian diplomatic efforts but
by increases in development aid, though there is no evidence to support or reject the case
of which the author is yet aware” (Carroll 2011: 11).
Our research directly addresses Carroll’s question, and proceeds as follows. In the
first section, we synthesize Australia’s history in the BWIs. We then explain AusAID’s
foreign aid policy, and expound on the existing research regarding Australian foreign aid.
We proceed by dividing our methodology section into three categories: descriptive
statistics, control variables, and regression results. We conclude with implications and a
discussion of Australia’s future in the BWIs.
4
II. Australia and the Bretton Woods Institutions
In the years post-World War II, Australia was among the almost 50 countries that
congregated in an array of newly founded international organizations. Two of these
organizations were the BWIs, which Australia joined in 1947. Yet despite this long
history in global governance, Australia is absent from international power politics today.
With its relatively small economy (Australia ranks behind Los Angeles, USA, in a 2009
World Bank analysis of top world economies. And in terms of GDP PPP, Australia falls
behind Mexico, Indonesia, Turkey, and Iran.), Australia lacks the clout of G8,3 G8+5, and
BRICS members (World Bank 2009).
In spite of this, Australia consistently exercises power the BWI Executive Boards.
Eight governments, or “great powers” in the BWIs—the United States, Japan, Germany,
France, the United Kingdom, China, Saudi Arabia, and Russia (in order of vote-share)—
have country-specific directors (Vreeland 2011). The other 180 BWI members choose the
remaining 16 (IMF) and 17 (World Bank) directors by forming blocs, usually aligned by
geographical region or colonial legacy. Since 1960, Australia has served on one of the
BWI Executive Boards all but two years. Today, Australia’s bloc includes Kiribati,
Korea, Marshall Islands, Micronesia, Mongolia, New Zealand, Palau, Papua New
Guinea, Samoa, Seychelles, Solomon Islands, Tuvalu, Uzbekistan, and Vanuatu.
Executive Directors have considerable power.4 BWI Directors have the final say
the organizations’ most critical decisions: lending, hiring, and evaluations of membercountries’ economic policies. Furthermore, the position accompanies a status of prestige
3
At the time of publication, a more accurate description of the G8 is the G7+1 suspended member.
Certainly, the BWI Executive Boards are no Security Council, on which Australia rarely serves
(Langmore 2013).
4
5
and access to private information in board meetings (Vreeland 2011). When considering
Australia’s relatively minor role in the global economy, such authority over international
economic policy seems even more impressive.
But how does Australia convince these small countries to continue electing it to
the Executive Board? Ostensibly, Executive Directors serve as representatives for all of
their bloc members. But surely, Vanuatu, say, does not rely on Australia and only
Australia to deliver its wants and needs to the Executive Board. If relationships of mutual
understanding alone determined IMF blocs, it is unlikely that Mongolia or Vietnam
would choose to elect Australia to the Board.
Australia, in fact, sits in a tenuous place in the IMF. In 2012, Australia’s voting
bloc had a voting power share of 4.94 percent, 2.68 percent of which was from Korea and
Australia alone (IMF 2012). Moreover, Australia’s Pacific neighbors have some of the
lowest quotas in the IMF, leaving Australia with minimal voting capacity (Rapkin and
Strand 2005). In fact, the smallest vote-share holder in the IMF—Tuvalu—is in
Australia’s bloc (IMF 2012). Although an independent share of 1.31 percent keeps
Australia out of the lowest echelon of the quota hierarchy, it holds little gravitas
compared to the powerhouse single-country voters like the United States (17.46 percent),
or the United Kingdom and France (both at 5.05 percent).5
Consequently, without the electoral support of its bloc members, Australia would
lose its most authoritative position in global governance. Thus, it is willing to pay for
their support with increased amounts of foreign aid.
We will be inserting a paragraph here about New Zealand and Korea.
5
In their research, Rapkin and Strand discuss more appropriate ways to calculate and define the IMF
quotas.
6
III. Determining Australian Foreign Aid
The Australian Agency for International Development (AusAID) makes a bold
proclamation in its 2012-13 Annual Report: “The fundamental purpose of the Australian
aid program is to help people overcome poverty. This also serves Australia’s national
interests by promoting stability and prosperity both in our region and beyond” (AusAID
2013). The 2011 Partnership Framework between AusAID and the World Bank
epitomizes the agency’s lofty goals, as both parties claim to share the objective of having
the “most effective aid program possible” (AusAID 2012).
Defending the effectiveness of its program, AusAID declares that its regional
focus is the best use of its aid budget, because “two-thirds of the world’s poor live in the
Asian Pacific” (AusAID 2012). McCawley of Sydney’s Lowy Institute of Public also
asserts that “long-term mass poverty in the third world” is an international emergency in
the context of Asia (McCawley 2009). But AusAID’s unsubstantiated claim of regional
poverty ignores an important caveat: 46 percent of the world’s poor do live in the Asian
Pacific—in India and China, where Australia allocates almost no foreign aid (World
Bank 2010).
AusAID’s questionable position on the economic status of its aid recipients
(AusAID 2012), alongside reports that its aid methods may be ineffective and corrupt
(Davis 2009; Dollery, Fleming, and Heinecke 2008), surely challenges the RN model of
Australian foreign aid. Easterly and Williamson find that Australia is one of the “largest
donors of food aid,” an often tied aid practice in which “higher income countries. . .shed
their excess agricultural products without any concern for the local agricultural markets
7
in the receiving country.” In addition to food aid, more than 30 percent of Australia’s
foreign aid is technical assistance, which “must be used to hire consultants from the
donor country” (Easterly and Williamson 2011).
Moreover, when the aid program faced dramatic bureaucratic changes in 2013, it
did so at the cost of aid effectiveness. ActionAid Australia noted its concerns after the
government announced in September 2013 that AusAID would merge with the
Department of Foreign Affairs and Trade (DFAT).
“The government’s short sighted decision to integrate AusAID into DFAT
will have massive and devastating effects on Australia’s aid program and on the
people living in poverty that the program supports. With AusAID reporting to
DFAT, we will inevitably see the aid budget used to promote Australia’s national
interests first and foremost. Aid programs that don’t contribute to Australia’s
interests will be the first to go, and we are extremely concerned about what this
will mean for the most marginalised communities in some of the world’s poorest
countries. The message Tony Abbott is sending to the world’s poor is that
Australia is no longer committed to ending poverty.” (SBS 2013).
The merger lends an obvious answer to the question of Australian foreign aid.
Australia funds its trade partners. Since Australia’s natural trade partners are in the
developing world, its economy will surely benefit if these partners have more money to
spend on its imports. Alesina and Dollar’s findings support this view. They report that
Australia gives about twice as much aid to open rather than closed economies, rewarding
good economic policy (Alesina and Dollar 2000). Foreign aid analysis has historically
found that countries give to their trade partners, and Australia is no exception to this
theme6 (Bermeo 2012, Berthelemy 2006, Berthelemy and Tichit 2004).
Yet, many of Australia’s trade partners are also its neighbors in the Asian Pacific.
Perhaps, as Neumayer suggests, Australia merely attempts to exert a sphere of influence
The trend continues today. Australia has recently affirmed that its “highest regional trade negotiation
priority is the conclusion of the Trans-Pacific Partnership Agreement” (TPP) (DFAT 2012b).
6
8
by concentrating its aid in the Asian Pacific (Neumayer 2003).7 Neumayer defines this
idea as regional bias. Or, considering that many countries in Australia’s region also share
its colonial ties, maybe Australia bases its foreign aid policy on colonial history. Alesina
and Dollar find that 55.5 percent of Australia’s aid goes to its former colonies, while
Isopi and Mattesini find a statistically significant relationship between colonial status and
aid received (Isopi and Mattesini 2008).
As the introduction discusses, few scholars have considered how Australia’s
desire for power in the BWIs influences its foreign aid distribution. Yet Carroll’s 2011
research prompts us to explore a new hypothesis regarding Australian foreign aid:
Australia buys its power in the Bretton Woods Institutions by exchanging foreign aid for
membership in its voting blocs.
IV. Methods
A. Descriptive Data
We test whether members of Australia’s BWI bloc receive more foreign aid than
other countries when controlling for regional status, colonial past, and bilateral trade with
Australia. We analyze a time-series cross-sectional dataset of the Official Development
Assistance (ODA) that Australia provides to countries. The dataset comes from the
Organization for Economic Cooperation and Development (OECD) and its Development
Assistance Committee (DAC). It includes annual observations from 1960 to 2009 for 186
countries. The dataset consists of 9,078 country-year observations, and out of these
country-year observations, Australia provides aid in 3,070 of them.
Hugo Dobson also discusses Australia’s motivations for regionalism, but in terms of G20 involvement
(Dobson 2011).
7
9
We generate a dichotomous indicator for membership in Australia’s BWI bloc,
our main independent variable. The indicator is coded 1 for years when a country is a part
of the Australian bloc and coded 0 otherwise. The country-years where the indicator is 1
are: South Africa (1960-1974), New Zealand (1963-2009), Philippines (1975-2009),
South Korea (1979-2009), Vietnam (1960-1966), Papua New Guinea (1977-2009),
Lesotho (1969-1972), Western Samoa (1973-2009), Marshall Islands (1993-2009),
Swaziland (1971-1974), Mongolia (1993-2009), the Federal State of Micronesia (19952009), Seychelles (1979-2009), Solomon Islands (1979-2009), Vanuatu (1983-2009),
Palau (1996-2009), Kiribati (1987-2009), Cambodia (1995-2009).8
Excluding Korea and New Zealand, the two developed countries that have served
as Executive Directors and rotated the Alternate Directorship, Seychelles has the highest
per capita GDP in the Australian bloc countries at $13,684 (Constant 2013 USD).
Australia provides its bloc members approximately 48 percent of its aid budget.
Considering that the population of these countries is less than 4 percent of the world’s
population, this is a high amount of aid earmarked for solely Australian bloc countries.
However, other factors, such as regional status and bilateral may confound this apparent
relationship. As a result, we begin a rigorous analysis of this perceived relationship.
8
Tuvalu and Uzbekistan joined the bloc in 2011, but our dataset only has data until 2009.
10
B. Control Variables
Our control variables include GDP per capita and population. Not only has
previous literature asserted these as important factors in determining foreign aid, they
also test for the recipient need model. Additionally, we capture the traditional
explanations for receiving Australian foreign aid by controlling for a past colonial legacy
with Australia, as well as Britain, regional status, and bilateral trade with Australia. We
predict that poor countries that have historically strong trade relations with Australia will
receive more aid, particularly if they have an Australian or British colonial past. In
addition, we control for Australia’s Executive Director status to determine whether
holding the position affects foreign aid distribution. We include a dichotomous indicator
1 for years when Australia is Executive Director of both institutions, and 0 otherwise.
11
Years for which the indicator was 0 are: 1971-1976, 1981, 1982, 1987-1990, 1995-1999,
2004-2007, and 2010. We expect that when Australia holds the Executive Director seat in
the BWI, more aid is dispersed to members of their bloc because of promises made in the
election period.
Bilateral trade data is from the dyadic dataset used in the Correlates of War
project. The dataset measures trade flows between states from 1870-2009 and contains
national export and import data for all countries. Countries in Australia’s region include:
East Timor, Papua New Guinea, Western Samoa, Marshall Islands, the Federal State of
Micronesia, Samoa, Solomon Islands, Vanuatu, Palau, Tonga, New Zealand, Kiribati,
Tuvalu, Fiji, and Nauru. This variable is time-invariant and always coded 1 for these
countries, and 0 otherwise.
We expect a positive and statistically significant correlation between the controls
and Australian foreign aid after we place an Ordinary Least Squares regression (OLS) on
the data. However, we wish to know if the BWI bloc indicator will remain statistically
significant with rigorous controls.
Finally, we apply a year-fixed effects model to our regression analysis to address
possible endogeneity. We do consider controlling for country-fixed effects, but since
there are minimal changes in other variables of interest including the BWI bloc
dichotomous indicator, it is not possible to include them. As a result, we control for
region fixed effects in lieu of controlling for country fixed effects. While these measures
should capture unobserved endogenity between both years and regions, in lieu of
countries, we keep their possible effects in mind.
12
C. Regression Results
The regression results support our hypothesis. Australian bloc status has a
statistically significant effect on foreign aid distribution to countries. The coefficient of
Australian bloc status is positive and statistically significant at the 0.01 level in all
models including those with all control variables. Table 1 displays descriptive statistics
and
data
sources.
13
TABLE 1: Descriptive Statistics
Variable
Stata Name
Obs.
Mean
Std. Dev.
Min
Max
Measure
Source
Australian
ODA
aussieaid
9,080
7.2
53.5
-1.06
1260.23
constant 2010
USD, millions
OECD
Binary
IMF & WBG
Annual
Reports
Count
World
Development
Indicators
2012(WDI)
Membership in
Australia's
Bloc
Population
GDP per
capita
Bilateral
Trade
Membership in
Asian Pacific
aussieBWI
population
9,080
9,077
0.04
34,700,0
00
0.2
142,000,0
00
0
6,104
1
1,340,00
0,0000
constant 2010
gdppercapita
totalflow
7,122
3006
4868
55
61375
USD, thousand
WDI 2012
constant 2012
Correlates
9,080
191
1730
-18
75998
USD, millions
of War
9,080
0.06
0.2
0
1
Binary
Vreeland
regional
aussie
Australian
ODA when ED
aussieBWIED
9,080
0.02
0.15
0
1
Binary
World Bank
Reports;
Vreeland
Colony
aussiecolony
9,080
0.002
0.04
0
1
Binary
CIA World
Factbook
14
Table 2 illustrates that with (Model 2) and without (Model 1) preliminary controls
placed on the independent variable, there remains a positive, statistically significant
correlation between the log of Australian Aid and membership in the Australian bloc at
the 0.01 level. All of the controls had the expected effect, except for the Australian BWI
Executive Director variable, which had a statistically significant negative correlation
instead of the expected positive correlation. Overall, membership in the Australian bloc
delivers an extra
Table 2: Preliminary Effects on Log of Australian Aid
Variable
Log of Australian Aid
(1)
(2)
Membership in Australian
Bloc
1.442***
(0.061)
0.756***
(0.094)
No
No
0.428***
(0.012)
8753
0.06
-0.479***
(0.115)
(0.000)
0.127***
(0.008)
0.133***
(0.007)
2.216***
(0.071)
1.087***
(0.250)
0.365***
(0.029)
No
No
-1.80***
(0.122)
6077
0.4
Australian BWI Executive
Director Status
Log of Population
Log of Bilateral Trade
Australia’s Region
Australian Colony
British Colony
Year Fixed Effects
Country Fixed Effects
_cons
Number of observations
Adj. R-squared
Table 3 illustrates the results for when we address endogenity. When both models
for year fixed effects (Model 1) and country fixed effects (Model 2) are applied to the
data with all relevant controls, the positive correlation remains statistically significant at
the 0.01 level. Therefore, our results are robust after we apply fixed effects to the data.
Table 3: Results on Log of Australian Aid
Variable
Log of Australian Aid
Australian Bloc
GDP per Capita
Log of Population
Log of Bilateral Trade
Australia’s Region
Australian Colony
British Colony
Australian BWI Executive
Director Status
Year Fixed Effects
Country Fixed Effects
_cons
Number of observations
Adj. R-squared
(1)
(2)
0.709***
(0.195)
-0.000***
(0.000)
0.077***
(0.012)
0.181***
(0.016)
2.113***
(0.228)
0.977
(0.822)
0.321***
(0.027)
0.537***
(0.124)
-0.000***
(0.000)
0.118***
(0.008)
0.052***
(0.009)
2.646***
(0.089)
1.248
(0.840)
0.375***
(0.028)
-0.498***
(0.186)
-0.538***
(0.165)
Yes
No
-1.071***
(0.181)
6077
0.40
No
Yes
-1.725 ***
(0.120)
6077
0.51
16
Beyond our findings about the positive correlation between Australian ODA and
Australian bloc status, the effects of some of the control variables are noteworthy. We
find the expected negative correlation with GDP per capita, indicating that Australia still
follows are RN approach to ODA to a certain extent. The effects of the control variables
support the existing literature. Regional membership, colonial status, and trade have
positive, statistically significant correlations. Interestingly, Australia’s Executive Director
status has a statistically significant negative correlation with foreign aid. We suggest
more rigorous experiments to explain why Australia may give out less aid when it is the
Executive Director. It is possible that Australia increases donations before the vote, and
then decreases aid distribution while it is on the Executive Board.
In context, the results support the claim that Australia follows a DI model of
ODA. After rigorous controls, the correlation is positive, statistically significant, and
robust. Australia, despite its economic mediocrity and military negligence, remains a
power in international financial institutions through manipulating ODA.
Conclusion
Small and mid-level donors go to extensive lengths to gain clout in international
organizations. Despite its unassuming character on the world stage, Australia maintains a
commanding presence in the world’s preeminent financial institutions by exchanging
foreign aid for loyal votes. Since Australia cannot wield great military or economic
power, it pays increased costs in foreign aid to its BWI mates to assert its voice in global
financial decisions. Most members of Australia’s bloc reap the benefits of increased aid,
17
and the two members that do not require aid (Korea and New Zealand), have a separate
arrangement to rotate the Alternate Directorship. These commitments create a cohesive
bloc. Thus, despite its weak status relative to single elector states, Australia’s bloc has
remained remarkably consistent since the Cold War.
Still, we wonder if Australia’s system of exchanging aid for political power will
hold in the future. Reapportionments in the IMF and World Bank quota systems will
undoubtedly favor Korea and other Asian countries at the expense of the original 50
Bretton Woods countries. Perhaps Korea and the developing nations in Australia’s bloc
will come to challenge Australia for the Executive Directorship. Australia’s carefully
crafted system may fail as their current aid recipients assert themselves on the
international stage. While its foreign aid scheme has worked in the past, the future is
uncertain. Rising costs, domestic politics, and the growing Asian Tigers imperil the aidfor-votes arrangement Australia has cultivated for the last 50 years.
Pieter Willem Botha, one of the politicians who helped South Africa leave the
Australian bloc in 1975, stated in 1979, “We are moving into a changing world, we must
adapt otherwise we shall die.”
Australia would do well to heed his words.
18
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