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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