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Development Aid and Portfolio Funds: Trends, Volatility and Fragmentation


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  • Emmanuel Frot
  • Javier Santiso


This paper presents stylised facts about development aid and capital flows to developing countries. It compares their volumes and volatilities and finds that foreign aid is not the major source of finance for these countries any more, though not for all regions. The expansion of private flows has usually come at the cost of an increased volatility that adds up to aid volatility, already considered to be an issue. We do not find any negative and significant correlations between aid shocks and capital flow shocks. Investigating complementarity between flows, we show that in a cross section of countries official development aid (ODA) and capital flows are substitutes but not within countries. On the other hand capital flows are complements both across and within countries. We also make use of a private funds database in order to underline the differences between portfolio investors to emerging markets and aid donors. To our knowledge this paper is the first to use such data in comparison with aid flows. We find that private portfolio equity is more volatile than ODA, and that it is neither a substitute nor a complement of ODA, both across and within countries. We argue that these results reinforce the calls for a new stabilising role of ODA. We then study aid donors and private funds portfolios to contribute to the current debate on aid fragmentation by providing trends for the last 50 years. We show that aid donors have constantly been fragmenting their portfolios by giving aid to an increasing number of countries, but also by making asset allocations more equal across countries. Private portfolio equity funds, on the other hand, have done the opposite for ten years and put a heavy weight on few countries in their portfolios. These observations complement the existing results about the progressive nature of aid flows and the regressive nature of private flows. Cet article présente une série de faits stylisés sur l’aide au développement et les flux de capitaux en direction des pays en développement. Leurs quantités et volatilités sont comparées. Il est établi que l’aide au développement n’est plus la plus importante source de financement pour ces pays, bien qu’elle le reste pour certaines régions. Par ailleurs l’expansion des flux de capitaux s’accompagne généralement d’un accroissement de volatilité qui s’ajoute à celle de l’aide, elle-même déjà considérée comme problématique. Les chocs négatifs de flux de capitaux ne s’accompagnent généralement pas de chocs positifs d’aide. Nous étudions la complémentarité de ces deux types de transferts et montrons que les pays qui reçoivent plus de flux de capitaux reçoivent moins d’aide, mais que cette conclusion ne vérifie pas à l’intérieur du pays où les variations d’aide et de capitaux ne sont pas corrélées. Nous utilisons pour compléter ces résultats une base de données des fonds d’investissement privés afin de relever les différences entre les décisions des investisseurs qui détiennent ces portefeuilles et celles des donateurs d’aide. Nous établissons que les flux d’actions sont plus volatiles que l’aide et qu’ils n’en sont ni un substitut ni un complément. Ces résultats renforcent les propositions pour un nouveau rôle stabilisateur de l’aide. Nous étudions ensuite les portefeuilles des donateurs d’aide et des fonds d’investissement pour contribuer au débat actuel sur la fragmentation de l’aide en établissant les tendances pour les 50 dernières années. Nous montrons que les donateurs d’aide ont constamment fragmenté leurs portefeuilles en donnant de l’aide à un nombre sans cesse croissant de pays, mais aussi en égalisant leurs allocations parmi ces pays. Les fonds d’investissement en action ont fait l’opposé au cours des dix dernières années en pondérant fortement quelques pays dans leurs portefeuilles. Ces observations complètent les résultats existants sur la nature progressive des flux d’aide et celle régressive des flux privés.

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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Development Centre Working Papers with number 275.

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Date of creation: Dec 2008
Date of revision:
Handle: RePEc:oec:devaaa:275-en

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Keywords: fragmentation; capital flows; portfolio flows; volatility; aid; flux de portefeuille; fragmentation; volatilité; aide; flux de capitaux;

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Cited by:
  1. Ruerd RUBEN, 2012. "Dimensionner l'aide au développement : ce que nous enseigne l'évaluation. Dimensioning Development Aid: Some Lessons from Evaluation," Revue d’économie du développement, De Boeck Université, vol. 26(4), pages 95-123.
  2. Knack, Stephen & Smets, Lodewijk, 2012. "Aid tying and donor fragmentation," Policy Research Working Paper Series 5934, The World Bank.
  3. Easterly, William & Williamson, Claudia R., 2011. "Rhetoric versus Reality: The Best and Worst of Aid Agency Practices," World Development, Elsevier, Elsevier, vol. 39(11), pages 1930-1949.
  4. Kilby, Christopher, 2011. "What Determines the Size of Aid Projects?," World Development, Elsevier, Elsevier, vol. 39(11), pages 1981-1994.
  5. Andrea Filippo Presbitero, 2013. "Aid and Vulnerability," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 88, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  6. Frot, Emmanuel & Santiso, Javier, 2009. "Crushed Aid: Fragmentation in Sectoral Aid," SITE Working Paper Series 6, Stockholm Institute of Transition Economics, Stockholm School of Economics.
  7. Emmanuel Frot & Javier Santiso, 2011. "Herding in Aid Allocation," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 64(1), pages 54-74, 02.
  8. Gomez-Echeverri, Luis, 2013. "Foreign aid and sustainable energy," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  9. Larrú, José María, 2010. "Foreign Aid in Equatorial Guinea: Macroeconomic Features and Future Challenges," MPRA Paper 25001, University Library of Munich, Germany.
  10. Acharya, Arnab & Alvarez, Melisa Mart.nez, 2012. "Aid Effectiveness in the Health Sector," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  11. Larru, Jose Maria, 2009. "A structural analysis of foreign aid to ten Mediterranean countries," MPRA Paper 17865, University Library of Munich, Germany.
  12. Carro, Martha & Larrú, José María, 2010. "Flowing Together or Flowing Apart: An Analysis of the Relation between FDI and ODA Flows to Argentina and Brazil," MPRA Paper 25064, University Library of Munich, Germany.


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