Development Aid and Portfolio Funds

Emmanuel Frot · Javier Santisó

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International Development and Aid Global trade and economics Global Financial Crisis and Policies

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.

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References

2009Aid, Dutch disease, and manufacturing growth 2000Foreign Speculators and Emerging Equity Markets 2006Donor fragmentation and bureaucratic quality in aid recipients 2004The Impact of Education on Fertility and Child Mortality: Do Fathers Really Matter Less Than Mothers?2006Proliferation and fragmentation: Transactions costs and the value of aid 2003Aid Volatility: An Empirical Assessment 2004Donor Fragmentation and Bureaucratic Quality in Aid Recipients 1998Do funded pensions contribute to higher aggregate savings? A cross-country analysis

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