Aid, Dutch Disease and Manufacturing Growth
RAJAN R.G. and SUBRAMANIAN A. (2011) Presenters : BERTHAULT Constantin & TANG Shiwei Course : Methods in Empirical Development Economics Professor: Lisa Chauvet Université Paris 1 November 15th , 2016
Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Aim: to examine the eect of foreign aid in ows on the growth of manufacturing sectors, and to test whether the channel of excess appreciation works A lack of robust evidence of either positive or negative eect of aid on growth Cost emanating from aid oset bene ts through the channel of "Excess Appreciation" Excess appreciation: Relative Price of non-traded goods and trade goods caused by foreign aid in ows
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Simple two-sector model: Non-traded sectors: sustainable unmet demand, target of aid Traded sectors: manufacturing goods, related to growth → learning-by-trade
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Two Eects of foreign aid in ows In the short run
Resource Movement Eect Spending Eect
In the medium run
Aid → ↑ Supply and Productivity of non-traded goods Oset the 2 eects on the real exchange rate Ambiguous Eect
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Fact01: Intensity of aid and the manufacturing share in total GDP are negatively correlated. BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Fact02: Intensity of aid and the relative size of tradable sectors are negatively correlated. BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
3 Contributions: A within-country across-industry analysis Test whether the channel of real exchange rate appreciation works Using IV for aid to correct for reverse causality issue (aid ←→ growth)
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
A: To test if foreign aid has an impact on manufacturing growth
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
The methodology comes from the very famous paper of Rajan and Zingales in 1998, Financial Dependence and Growth. They suggest that one way to check whether a channel is at work is to see whether industries that might be most aected by a channel grow dierentially in countries where that channel is likely to be more operative. This is why they chose countries that receive aid greater than 1% of GDP or are low-income countries according to World Bank de nitions in the initial year of the sample. And why they chose the proxy will be explained later.
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing Growth November 15th ,
2016
9 / 26
Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Growthij = Constant + ζ1...m ∗ Country
Indicators
Transmission Mechanism
+ ζm+1...n ∗ Industry
Conlusion
Indicators
ζn+1 Industry i's share of manufacturing in country j in the initial period α(Aid to country*Sensitivity of industry i to exchange rate appreciation) + ij (1) +
+
Growth is the annual average rate of growth of value added of industry i in country j Country Indicators and Industry Indicators are xed eects Initial share of manufacturing controls for convergence-type eects α is the coe cient of interest, it captures an interaction between Aid and an industry's sensitivity to the exchange rate eects induced by foreign aid The main issue of the paper is to choose the right proxy for this variable.
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
10 / 26
Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
In the countries studied, the lack of competitiveness is likely to show up to a greater extent in exports than in import-competing industries. Exportability1 : an indicator variable for each industry, which takes the value 1 if the industry has a ratio of exports to value added (averaged across all countries in the sample) greater than the median across industries. It takes the value 0 otherwise. Exportability2 : a dummy equal to 1 for the four industries that have been most closely associated with the growth of developing countries (textiles, clothing, leather, and footwear). Why is this proxy a good choice ?
This shows if a product is exportable or not. If the value is 1, this industry will be sensible at a competitiveness eect on export. BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Databases: Industrial Statistics Database of the united nations industrial development organization (32 countries for the 1980s and 15 countries for the 1990s, 28 industries on these countries) for data on value added World Development Indicators for the data on the share of manufacturing and service to the GDP World Integrated Trade Solution data for exportability index OECD's Development Assistance Committee for data on aid
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Initial industry share(ij) Aid/GDP(j)*exportability1 index(i) Aid/GDP(j)*exportability2 index(i) Observations R-squared
OLS1980s -0.390*** -0.506** 684 0.415
Transmission Mechanism
OLS1980s -0.412*** -1.042*** 684 0.424
OLS1990s -0.231** -0.728** 357 0.328
Conlusion
OLS1990s -0.219*** -1.258*** 357 0.335
The dependent variable is the annual average growth in value added in industry i in country j. In all four cases, the interaction term is negative and statistically signi cant at the 5% con dence level or above. Value added in exportable industries grows relatively more slowly than for other industries in countries that receive more aid. BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Instruments for aid based on Rajan and Subramanian (2008) The idea is to model the supply of aid based on donor and donor-recipient relationships rather than on recipient-speci c characteristics.
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
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Introduction
Empirical strategy
BERTHAULT C. & TANG S.W.
Aid and Sensitivity to exchange rate
Transmission Mechanism
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
Conlusion
15 / 26
Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
B: To test if foreign aid has an impact on excess appreciation C: To test if excess appreciation has an impact on manufacturing growth BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
B: To test if foreign aid has an impact on excess appreciation Excess Appreciation Aid/GDP(j) 1980s 3.175*** Result: 3.175, positive, signi cant Simple positive correlation between excess appreciation and aid in ows.
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
C: To test if excess appreciation has an impact on manufacturing growth Growth Growth Excess Appreciation*exportability1 -0.069*** Excess Appreciation*exportability2 -0.199*** Result: negative, signi cant If Excess Appreciation is the channel, it should particularly aect exportable sectors. Exploit the similar methodology in the baseline model Excess appreciation has similar eect as aid on growth in value added of exportable industries. BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Growth Growth Excess Appreciation*exportability1 -0.058*** Excess Appreciation*exportability2 -0.179*** Aid/GDP*exportability1 -0.289 Aid/GDP*exportability2 -0.471 Include the aid and excess appreciation at the same time Aid is the deep causal determinant and excess appreciation is the main channel. The eect of aid is reduced/attenuated in the presence of excess appreciation. BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Growth Growth EA*exportability1 -0.190*** EA*exportability2 -0.510*** EA*ex1 EA*ex2 Fitted aid/GDP*exportability1 1.972*** Fitted aid/GDP*exportability2 2.158*** IV approach. The instruments for excess appreciation are the same as those used for aid in the baseline model(donor-related characteristics) Excess appreciation hurts the competitiveness of traded sectors BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Two steps to justify the results of model.
Step1: Are there any other factors instead of aid aect the sector growth? (Robustness check for A) Step2: Aid aects the industry growth only through the channel of excess appreciation? (Robustness check for B+C)
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
To test if there are other factors instead of aid to aect sector growth. Include other possible factors: Trade policy (Sachs-Warner Index) Average level of taris Black market premium (taking exchange rate mismanagement and distortions into consideration) Macroeconomic Instability (s.d. of consume price in ation)
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Step1:Are there any other factors instead of aid aect the sector growth? Growth Aid/GDP*ex1 -0.368* Tari*ex1 0.001** In 4 equations, they include aid intensity and exportability interaction term. For the other 4 variables, they exist in the 4 equations respectively. Aid term: signi cantly negative for 4 equations Other terms except for tari: insigni cant It is aid rather than other factors that aects the sector growth. BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Step2: Excess Appreciation is the only channel. Growth Aid/GDP*ex1 -0.596*** Aid/GDP*Financial Dependence 0.316 It doesn't appear that the channel through which the manufacturing growth is aected by aid is via nancial dependence. Magnitude of results are similar, so exportability is not an indirect proxy for capital intensity.
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Summary
Aid, instead of other policies, has a negative impact on the manufacturing growth. Excess Appreciation is the ONLY channel.
Criticism
Exportability1: May use a dierent calculation Instrument for aid: population size may create the violation of exclusion restriction.
BERTHAULT C. & TANG S.W.
Aid, Dutch Disease and Manufacturing GrowthNovember 15th ,
2016
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Introduction
Empirical strategy
Aid and Sensitivity to exchange rate
Transmission Mechanism
Conlusion
Thank you for your attention!
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