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Foreign Aid Allocation and Impact in
Latin America and the Caribbean (LAC):
A Cross-Country Analysis of Foreign Aid
impact on GDP Per Capita and Life
Expectancy.
ETIENNE ANCITO
LYNCHBURG COLLEGE
ECONOMICS THESIS
Motivation For Research Study
• Stagnation
of Latin American and Caribbean economies, while the
region receives substantial foreign aid.
• OECD 2016 Report.
Source: OECD - DAC ; http://www.oecd.org/dac/financing-sustainable-development/development-finance-data/aid-at-a-glance.htm
Contribution of this Paper
• A larger sample of countries and independent variables were
studied, which enables better analysis of the stagnation.
• In addition, if the causes for the lack of effectiveness can be
explained, then perhaps LAC governments could invest in eliminating
the factors that stunt growth in their economies.
• This would encourage donors to be more generous seeing that their
liberality alleviates poverty by stimulating economic development.
Background
• The flypaper effect theory
• Fiduciary risk
• The cobra effect
• Aid Fungibility
• Foreign Aid’s goal
Research Questions
• What is foreign aid’s impact on life expectancy?
• What is foreign aid’s impact on GDP per Capita?
• If foreign aid has a positive impact on GDP per Capita, then does an
increase in GDP per Capita causes an increase in life expectancy?
Literature
•Ekanayake and Chatma (2010) found, similarly to previous studies, that foreign
aid has mixed effects, and in some cases, it even produces adverse effects on
economic growth in developing countries.
•Palloni & Souza (2013 conucted a research on life expectancy in Latin America
and the Carribean and found that historically life expectancy in this region saw
little improvement until the 1950s when medical, nutritional and public health
interve.tions began to be implemented.
•Shpak's (2012) research findings included the determination of earmarks and
bilateral aid for health improvement to have a positive effect on avoidable or
senseless deaths.
Model Development
•The OLS method (Ordinary Least Squares) was used to perform a set of two
Ordinary Least Squares regressions. This method estimates the unknown
parameters in a linear regression model, with the goal of minimizing the sum of
the squares residuals between the observations.
Data Sources
•World Bank’s Development Indicators Database
•The Heritage Foundation
•Transparency International
•The United Nations Development Programme
Life Expectancy Model
LIFEEXPECTANCY= β0 + β1 LAGGEDLIFEEXPECTANCY +
β2NETODAPERCAPITA + β3LAGGEDNETODAPERCAPITA + β4GDPPERCAPITA +
β5IMPROVEDWATERSOURCE + β6IMPROVEDSANITATIONFACILITIES +
β7INCIDENCEOFTUBERCULOSIS + β8PREVALENCEOFHIV +
β9ECONOMICFREEDOMSCORE + β10DEATHRATE +
β11UNEMPLOYMENTLABORFORCE + ε (1)
Life Expectancy Variables Descriptions
Variable Name
Description (World Bank and Heritage)
LIFEEXPECTANCY
Life expectancy at birth, total (years)
LAGGEDLIFEEXPECTANCY
Lagged Life expectancy at birth, total
(years)
NETODAPERCAPITA
Net ODA received per capita (current
US$)
LAGGEDNETODAPERCAPITA
Net ODA received per capita (current
US$)
GDPPERCAPITA
IMPROVEDSANITATIONFACILITIES
IMPROVEDWATERSOURCE
INCIDENCEOFTUBERCULOSIS
PREVALENCEOFHIV
ECONOMICFREEDOMSCORE
DEATHRATE
GDP per capita (current US$)
Improved sanitation facilities (% of
population with access)
Improved water source (% of population
with access)
Incidence of tuberculosis (per 100,000
people)
Prevalence of HIV, total (% of population
ages 15-49)
Economic Freedom overall score
http://www.heritage.org
Death rate, crude (per 1,000 people)
Life Expectancy Variables Descriptions
and Expected Signs
Description (World Bank and
Heritage)
Expected Sign Direction
LIFEEXPECTANCY
Life expectancy at birth, total (years)
Dependent Variable
LAGGEDLIFEEXPECTANCY
Lagged Life expectancy at birth, total
(years)
+
NETODAPERCAPITA
Net ODA received per capita
(current US$)
-
LAGGEDNETODAPERCAPITA
Net ODA received per capita
(current US$)
-
GDPPERCAPITA
GDP per capita (current US$)
+
Improved sanitation facilities (% of
population with access)
+
IMPROVEDWATERSOURCE
Improved water source (% of
population with access)
+
INCIDENCEOFTUBERCULOSIS
Incidence of tuberculosis (per
100,000 people)
-
PREVALENCEOFHIV
Prevalence of HIV, total (% of
population ages 15-49)
-
Economic Freedom overall score
http://www.heritage.org
+
Death rate, crude (per 1,000 people)
-
Variable Name
IMPROVEDSANITATIONFACILITIES
ECONOMICFREEDOMSCORE
DEATHRATE
GDP Per Capita Model
GDPPERCAPITA = β0 + β1NETODA + β2LAGGEDNETODAPERCAPITA +
β3CORRUPINDEX + β4ECONOMICFREEDOMSCORE + β6CCSERVICES +
β7NATURALRESOURCESRENTS + β8FOREIGNDIRECTINVESMENT +
β9GOODSSERVICESEXPORTS + β10EMPLOYMENT1524POPULATION +
β11UNEMPLOYMENTLABORFORCE + ε (2)
GDP Per Capita Variables Descriptions
Variable Name
GDPPERCAPITA
Brief Description
GDP per capita (current US$)
NETODAPERCAPITA
Net ODA received per capita (current US$)
LAGGEDNETODAPERCAPITA
Net ODA received per capita (current US$)
CORRUPINDEX
ECONOMICFREEDOMSCORE
CCSERVICES
Corruption Index
Economic Freedom overall scorehttp://www.heritage.org
Computer, communications and other services (% of commercial
service exports)
NATURALRESOURCESRENTS
Total natural resources rents (% of GDP)
FOREIGNDIRECTINVESMENT
Foreign direct investment, net inflows (% of GDP)
GOODSSERVICESEXPORTS
EMPLOYMENT1524POPULATION
UNEMPLOYMENTLABORFORCE
Exports of goods and services (% of GDP)
Employment to population ratio, ages 15-24, total (%) (modeled
ILO estimate)
Unemployment, total (% of total labor force) (modeled ILO
estimate
GDP Per Capita Variables Descriptions
and Expected Signs
Brief Description
Expected Sign
Direction
GDP per capita (current US$)
Dependent variable
NETODAPERCAPITA
Net ODA received per capita (current US$)
+
LAGGEDNETODAPERCAPITA
Net ODA received per capita (current US$)
+
Corruption Index
Economic Freedom overall
scorehttp://www.heritage.org
+
Variable Name
GDPPERCAPITA
CORRUPINDEX
ECONOMICFREEDOMSCORE
+
Computer, communications and other
services (% of commercial service exports)
+
NATURALRESOURCESRENTS
Total natural resources rents (% of GDP)
+
FOREIGNDIRECTINVESMENT
Foreign direct investment, net inflows (% of
GDP)
+
Exports of goods and services (% of GDP)
+
EMPLOYMENT1524POPULATION
Employment to population ratio, ages 15-24,
total (%) (modeled ILO estimate)
+
UNEMPLOYMENTLABORFORCE
Unemployment, total (% of total labor force)
(modeled ILO estimate
_
CCSERVICES
GOODSSERVICESEXPORTS
List of countries studied in the Life Expectancy regression
equation listed by HDI ranking as of 2014 Source:
http://hdr.undp.org/en/data
Argentina
0.835572018
Chile
0.832178477
Uruguay
0.792762977
Panama
0.779677597
Cuba
0.769011135
Costa Rica
0.765746905
Venezuela, RB
0.7622524
Mexico
0.756207912
Brazil
0.755291956
Peru
0.734203129
Ecuador
0.731674443
Colombia
0.7201704
Jamaica
0.718529602
Dominican Republic
0.715028472
Suriname
0.714286152
Paraguay
0.679164356
El Salvador
0.665784288
Bolivia
0.661830764
Nicaragua
0.631432134
Guatemala
0.627208788
Honduras
0.606054608
Haiti
0.483373299
List of countries studied in the GDP Per Capita Regression
equation listed by HDI ranking as of 2014 Source:
http://hdr.undp.org/en/data
Argentina
Chile
Uruguay
Panama
Costa Rica
Venezuela, RB
Mexico
Brazil
Peru
Ecuador
Colombia
Jamaica
Dominican Republic
Paraguay
El Salvador
Bolivia
Nicaragua
Guatemala
Honduras
Haiti
0.835572018
0.832178477
0.792762977
0.779677597
0.765746905
0.7622524
0.756207912
0.755291956
0.734203129
0.731674443
0.7201704
0.718529602
0.715028472
0.679164356
0.665784288
0.661830764
0.631432134
0.627208788
0.606054608
0.483373299
Implications
•For governments and policy markers:
◦ Implementation of expansionary policies
◦ Endeavour to decrease corruption
◦ Create an enabling environment to allow foreign aid and foreign direct
investments to have a significant impact.
Future Research
•Life Expectancy
◦ Health expenditure
◦ Natural disasters
◦ Educational attainment
•GDP Per Capita
◦ Agricultural output
◦ Educational attainment (The more secondary degrees, the more stable
(Collier 2007))
◦ Political Stability Index