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Development Aid and Portfolio Funds: Trends, Volatility and Fragmentation

Author

Listed:
  • Emmanuel Frot

    (Stockholm Institute of Transition Economics)

  • Javier Santiso

    (OECD)

Abstract

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.

Suggested Citation

  • Emmanuel Frot & Javier Santiso, 2008. "Development Aid and Portfolio Funds: Trends, Volatility and Fragmentation," OECD Development Centre Working Papers 275, OECD Publishing.
  • Handle: RePEc:oec:devaaa:275-en
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    File URL: http://dx.doi.org/10.1787/227641521672
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    References listed on IDEAS

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    1. Christopher Adam & Stephen O'Connell & Edward Buffie & Catherine Pattillo, 2009. "Monetary Policy Rules for Managing Aid Surges in Africa," Review of Development Economics, Wiley Blackwell, vol. 13(s1), pages 464-490, August.
    2. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    3. Martens,Bertin & Mummert,Uwe & Murrell,Peter & Seabright,Paul, 2008. "The Institutional Economics of Foreign Aid," Cambridge Books, Cambridge University Press, number 9780521055390.
    4. Roodman, David, 2006. "Aid Project Proliferation and Absorptive Capacity," WIDER Working Paper Series 004, World Institute for Development Economic Research (UNU-WIDER).
    5. Oya Celasun & Jan Walliser, 2008. "Predictability of aid: Do fickle donors undermine aid effectiveness?," Economic Policy, CEPR;CES;MSH, vol. 23, pages 545-594, July.
    6. Knack, Stephen & Rahman, Aminur, 2007. "Donor fragmentation and bureaucratic quality in aid recipients," Journal of Development Economics, Elsevier, vol. 83(1), pages 176-197, May.
    7. Bekaert, Geert & Harvey, Campbell R. & Lumsdaine, Robin L., 2002. "Dating the integration of world equity markets," Journal of Financial Economics, Elsevier, vol. 65(2), pages 203-247, August.
    8. Daniel Cohen & Hélène Djoufelkit-Cottenet & Pierre Jacquet & Cécile Valadier, 2008. "Lending to the Poorest Countries: A New Counter-Cyclical Debt Instrument," OECD Development Centre Working Papers 269, OECD Publishing.
    9. Wang, Jianxin, 2007. "Foreign equity trading and emerging market volatility: Evidence from Indonesia and Thailand," Journal of Development Economics, Elsevier, vol. 84(2), pages 798-811, November.
    10. Froot, Kenneth A. & Tjornhom Donohue, Jessica, 2002. "The persistence of emerging market equity flows," Emerging Markets Review, Elsevier, vol. 3(4), pages 338-364, December.
    11. repec:dau:papers:123456789/4371 is not listed on IDEAS
    12. Denis Cogneau & Sylvie Lambert, 2006. "L'aide au développement et les autres flux Nord-Sud : complémentarité ou substitution?," Working Papers DT/2006/09, DIAL (Développement, Institutions et Mondialisation).
    13. Bekaert, Geert & Harvey, Campbell R., 2003. "Emerging markets finance," Journal of Empirical Finance, Elsevier, vol. 10(1-2), pages 3-56, February.
    14. David Fielding & George Mavrotas, 2008. "Aid Volatility and Donor-Recipient Characteristics in 'Difficult Partnership Countries'," Economica, London School of Economics and Political Science, vol. 75(299), pages 481-494, August.
    15. Javier Santiso, 2008. "Banking on Development. Private Financial Actors and Donors in Developing Countries," OECD Development Centre Policy Briefs 34, OECD Publishing.
    16. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 1-4.
    17. Arnab Acharya & Ana Teresa Fuzzo de Lima & Mick Moore, 2006. "Proliferation and fragmentation: Transactions costs and the value of aid," Journal of Development Studies, Taylor & Francis Journals, vol. 42(1), pages 1-21.
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    Citations

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    Cited by:

    1. Andrea Filippo Presbitero, 2013. "Aid and Vulnerability," Mo.Fi.R. Working Papers 88, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    2. Frot, Emmanuel & Santiso, Javier, 2009. "Crushed Aid: Fragmentation in Sectoral Aid," SITE Working Paper Series 6, Stockholm School of Economics, Stockholm Institute of Transition Economics.
    3. Emmanuel Frot & Javier Santiso, 2011. "Herding in Aid Allocation," Kyklos, Wiley Blackwell, vol. 64(1), pages 54-74, February.
    4. Gómez-Echeverri, Luis, 2013. "Foreign Aid and Sustainable Energy," WIDER Working Paper Series 093, World Institute for Development Economic Research (UNU-WIDER).
    5. Larrú, José María, 2010. "Foreign Aid in Equatorial Guinea: Macroeconomic Features and Future Challenges," MPRA Paper 25001, University Library of Munich, Germany.
    6. 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. 20(4), pages 95-123.
    7. Han, Lu & Koenig-Archibugi, Mathias, 2015. "Aid Fragmentation or Aid Pluralism? The Effect of Multiple Donors on Child Survival in Developing Countries, 1990–2010," World Development, Elsevier, vol. 76(C), pages 344-358.
    8. Larru, Jose Maria, 2009. "A structural analysis of foreign aid to ten Mediterranean countries," MPRA Paper 17865, University Library of Munich, Germany.
    9. repec:unu:wpaper:wp2012-69 is not listed on IDEAS
    10. Hartmann, Simon, 2011. "Political constraints on division of labor in development policy across countries: A proposal for a more viable coordination procedure at the EU level," Working Papers 28, Österreichische Forschungsstiftung für Internationale Entwicklung (ÖFSE) / Austrian Foundation for Development Research.
    11. Kilby, Christopher, 2011. "What Determines the Size of Aid Projects?," World Development, Elsevier, vol. 39(11), pages 1981-1994.
    12. Knack, Stephen & Smets, Lodewijk, 2013. "Aid Tying and Donor Fragmentation," World Development, Elsevier, vol. 44(C), pages 63-76.
    13. Easterly, William & Williamson, Claudia R., 2011. "Rhetoric versus Reality: The Best and Worst of Aid Agency Practices," World Development, Elsevier, vol. 39(11), pages 1930-1949.
    14. Acharya, Arnab & Martínez-Álvarez, Melisa, 2012. "Aid Effectiveness in the Health Sector," WIDER Working Paper Series 069, World Institute for Development Economic Research (UNU-WIDER).
    15. 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.

    More about this item

    Keywords

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

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid

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