Hostname: page-component-586b7cd67f-rcrh6 Total loading time: 0 Render date: 2024-11-30T15:54:34.012Z Has data issue: false hasContentIssue false
  • English
  • Français

Funding Self-Sustaining Development: The Role of Aid, FDI and Government in Economic Success

Published online by Cambridge University Press:  04 January 2006

Stephen Kosack  and
Jennifer Tobin
Stephen Kosack
Affiliation:
Department of Political Science at Yale University, New Haven, Conn, [email protected]
Jennifer Tobin
Affiliation:
Department of Political Science at Yale University, New Haven, Conn., and Brookings Institution, Washington, D.C., [email protected]
Get access

Abstract

This article challenges a long-held development-policy assumption that aid and foreign-direct investment (FDI) serve as substitutes or complements in accelerating the development of the world's poorer countries. We show both theoretically and empirically that aid and FDI affect development differently. Aid contributes powerfully to both economic growth and human development, and the higher the level of human capital in a country, the more aid contributes. By contrast, FDI, at best, has no effect on economic growth and actually slows the rate of human development in less-developed countries. We find no evidence that the degree of democratic responsiveness in government conditions the effectiveness of either aid or FDI, although we do find that democracy independently increases human development in all but the most developed countries. Our results demonstrate that FDI and aid are not, and cannot be, substitutes in the development of the world's poorer countries. Nor even can they be thought of as complements—certainly not at mid to low levels of development. In the end, poor countries need democracy and aid, not FDI.We are extremely grateful to Susan Rose-Ackerman, Gustav Ranis, Frances Rosenbluth, Kenneth Scheve, and participants at the Leitner Political Economy Seminar at Yale University in December 2003 for very helpful comments. We also received valuable suggestions from two anonymous reviewers. Stephen Kosack would like to thank the National Science Foundation for the support of a Graduate Research Fellowship.

Type
Research Article
Information
International Organization , Volume 60 , Issue 1 , January 2006 , pp. 205 - 243
Copyright
© 2006 The IO Foundation and Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abbott, Frederick M. 2000. NAFTA and the Legalization of World Politics: A Case Study. International Organization 54 (3):519–47.Google Scholar
Achen, Christopher. 2000. Why Lagged Dependent Variables Can Suppress the Explanatory Power of Other Dependent Variables. Working paper. Department of Political Science. Ann Arbor: University of Michigan.
Anderson, James. 2000. Corruption in Slovakia: Results of Diagnostic Surveys. Working paper. Washington, D.C.: World Bank.
Anderson, Theodore W., and Cheng Hsiao. 1982. Formulation and Estimation of Dynamic Models Using Panel Data. Journal of Econometrics 18 (1):47–82.Google Scholar
Arellano, Manuel. 1989. A Note on the Anderson-Hsiao Estimator for Panel Data. Economics Letters 31 (4):337–41.Google Scholar
Arellano, Manuel, and Stephen Bond. 1991. Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equation. Review of Economic Studies 58 (2):277–297.Google Scholar
Arellano, Manuel, and O. Bover. 1995. Another Look at Instrumental Variable Estimation of Error-Component Models. Journal of Econometrics 68 (1):29–51.Google Scholar
Barrera, Albino. 1990. The Role of Maternal Schooling and Its Interaction with Public Health Programs in Child Health Production. Journal of Development Economics 32 (1):69–91.Google Scholar
Barro, Robert J. 1998. Determinants of Economic Growth: A Cross-Country Empirical Study. Cambridge, Mass.: MIT Press.
Blomstrom, Magnus, and Ari Kokko. 1996. The Impact of Foreign Investment on Host Countries: A Review of the Empirical Evidence. Policy Research Working Paper 1745. Washington, D.C.: World Bank.
Blomstrom, Magnus, Ari Kokko, and Steven Globerman. 2001. The Determinants of Host Country Spillovers from Foreign Direct Investment: A Review and Synthesis of the Literature. In Inward Investment, Technological Change, and Growth: The Impact of Multinational Corporations on the UK Economy, edited by Nigel Pain, 34–65. New York: Palgrave.
Blomstrom, Magnus, Robert Lipsey, and Mario Zejan. 1996. Is Fixed Investment the Key to Economic Growth? Quarterly Journal of Economics: 111 (1):269–76.Google Scholar
Blundell, R., and S. Bond. 1998. Initial Conditions and Moment Restrictions in Dynamic Panel Data Models. Journal of Econometrics 87 (1):115–43.Google Scholar
Bond, Stephen. 2002. Dynamic Panel Data Models: A Guide to Micro Data Methods and Practice. CWP09/02. London: Centre for Micro Data Methods and Practice, Institute for Fiscal Studies.
Boone, Peter. 1996. Politics and the Effectiveness of Foreign Aid. European Economic Review 40 (2):289–329.Google Scholar
Borensztein, Eduardo, Jose De-Gregorio, and Jong-Wha Lee. 1998. How Does Foreign Direct Investment Affect Economic Growth? Journal of International Economics 45 (1):115–35.Google Scholar
Brown, David S. 1999. Reading, Writing, and Regime Type: Democracy's Impact on Primary School Enrollment. Political Research Quarterly 52 (4):681–707.Google Scholar
Brown, David S., and Wendy Hunter. 1999. Democracy and Social Spending in Latin America, 1980–92. American Political Science Review 93 (4):779–90.Google Scholar
Bueno de Mesquita, Bruce, James D. Morrow, Randolph M. Siverson, and Alastair Smith. 1999. An Institutional Explanation for the Democratic Peace. American Political Science Review 93 (4):791–807.Google Scholar
Carkovic, Maria, and Ross Levine. 2002. Does Foreign Direct Investment Accelerate Economic Growth? Working Paper. Minneapolis: Carlson School of Management, University of Minnesota.
Caves, Richard. 1996. Multinational Enterprise and Economic Analysis. Cambridge: Cambridge University Press.
Dollar, David, and Jakob Svensson. 2000. What Explains the Success or Failure of Structural Adjustment Programmes? Economic Journal 110 (466):894–917.Google Scholar
Feenstra, Robert C., and James R. Markusen. 1994. Accounting for Growth with New Inputs. International Economic Review 35 (2):429–47.Google Scholar
Findlay, Robert. 1978. Some Aspects of Technology Transfer and Direct Foreign Investment. American Economic Review 68 (2):275–79.Google Scholar
Frey, R. Scott, and Ali Al-Roumi. 1999. Political Democracy and the Physical Quality of Life: Cross-National Evidence. Social Indicators Research 47 (1):73–97.Google Scholar
Frey, Bruno S., and Friedrich Schneider. 1986. Competing Models of International Lending Activity. Journal of Development Economics 20 (2):225–45.Google Scholar
Gallup, John, and Jeffrey D. Sachs. 1999. Geography and Economic Development, Center for International Development, Working Paper 1. Cambridge, Mass.: Harvard University.
Garcia, Marito. 1990. Resource Allocation and Household Welfare: A Study of Personal Sources of Income on Food Consumption, Nutrition and Health in the Philippines. Ph.D. diss., Institute of Social Studies, The Hague, Netherlands.
Goldsmith, Arthur. 1995. Democracy, Property Rights, and Economic Growth. Journal of Development Studies 32 (2):157–75.Google Scholar
Grabowski, Richard, and Michael Schields. 1989. Lewis and Ricardo: A Reinterpretation. World Development 17 (2):193–98.Google Scholar
Griffin, Keith B. 1978. International Inequality and National Poverty. London: Macmillan.
Hoddinott, John, and Lawrence Haddad. 1991. Household Expenditures, Child Anthropometric Status and the Intrahousehold Division of Income: Evidence from the Côte d'Ivoire. Research Program in Development Studies Discussion Paper 155. Princeton, N.J.: Woodrow Wilson School, Princeton University.
Huang, Yasheng. 1998. Foreign Direct Investment in China. Singapore. Singapore: National University of Singapore Press.
Huang, Yasheng. 2001a. Internal and External Reforms in China. Cato Journal 21 (1):43–64.Google Scholar
Huang, Yasheng. 2001b. The Role of Foreign-Invested Enterprises in the Chinese Economy: An Institutional Foundation Approach. In China, the United States and the Global Economy, edited by Shuxun Chen, and Charles Wolf, Jr., 147–91. Santa Monica, Calif.: Rand.
Huntington, Samuel P. 1968. Political Order in Changing Societies. New Haven, Conn.: Yale University Press.
International Monetary Fund (IMF). 2004. International Financial Statistics. Washington, D.C.: IMF.
Kiviet, Jan F. 1995. On Bias, Inconsistency, and Efficiency of Various Estimators in Dynamic Panel Data Models. Journal of Econometrics 68 (1):53–78.Google Scholar
Koizumi, Tetsunori, and Kenneth J. Kopecky. 1980. Foreign Direct Investment, Technology Transfer, and Domestic Employment Effects. Journal of International Economics 10 (1):1–20.Google Scholar
Kosack, Stephen. 2003. Effective Aid: How Democracy Allows Development Aid to Improve the Quality of Life. World Development 31 (1):1–22.Google Scholar
LeBlang, David. 1996. Property Rights, Democracy, and Economic Growth. Political Research Quarterly 49 (1):5–27.Google Scholar
Loungani, Prakash, and Assaf Razin. 2001. How Beneficial Is Foreign Direct Investment for Developing Countries. Finance and Development 38 (2):6–9.Google Scholar
Maizels, Alfred, and Machiko K. Nissanke. 1984. Motivations for Aid to Developing Countries. World Development 12 (9):879–900.Google Scholar
Mansfield, Edwin, and Anthony Romeo. 1980. Technology Transfer to Overseas Subsidiaries by U.S.-Based Firms. Quarterly Journal of Economics 95 (4):737–50.Google Scholar
Marshall, Monty G., and Keith Jaggers. 2000. Polity IV Project. College Park: University of Maryland.
McKinstry Robin, Patricia. 1984. The BIT Won't Bite: The American Bilateral Investment Treaty Program. American University Law Review 33 (4):958.Google Scholar
Morris, M. D. 1979. Measuring the Condition of the World's Poor: The Physical Quality of Life Index. Oxford: Pergamon Press.
Mosley, Paul, John Hudson, and Sara Horrel. 1987. Aid, the Public Sector and the Market in Less Developed Countries. Economic Journal 97 (387):616–41.Google Scholar
Pigou, Arthur C. 1952. The Economics of Welfare. 4th ed. London: Macmillan.
Powell, Colin. 2002a. Making Sustainable Development Work: Governance, Finance, and Public-Private Cooperation. Remarks at State Department Conference, Meridian International Center, Washington, D.C.
Powell, Colin. 2002b. Remarks at World Summit on Sustainable Development, Johannesburg, South Africa.
Przeworski, Adam, Michael E. Alvarez, Jose Antonio Cheibub, and Fernando Limongi. 2000. Democracy and Development: Political Institutions and Material Well-Being in the World. 1950–1990. New York: Cambridge University Press.
Ranis, Gustav, Frances Stewart, and Alejandro Ramirez. 2000. Economic Growth and Human Development. World Development 28 (2):197–219.Google Scholar
Razin, Assaf. 2003. FDI Flows and Domestic Investment: Overview. CESifo Economic Studies 49 (3):415–28.Google Scholar
Rodriguez-Clare, Andres. 1996. Multinationals, Linkages and Economic Development. American Economic Review 86 (4):852–73.Google Scholar
Rodrik, Dani. 1999. Democracies Pay Higher Wages. Quarterly Journal of Economics 114 (3):707–38.Google Scholar
Rosenzweig, Mark R., and T. Paul Schultz. 1982. Child Mortality and Fertility in Colombia: Individual and Community Effects. Health Policy and Education 2:305–48.Google Scholar
Saggi, Kamal. 2002. Trade, Foreign Direct Investment, and International Technology Transfer: A Survey. World Bank Research Observer 17 (2):191–235.Google Scholar
Sargan, John D. 1958. The Estimation of Economic Relationships Using Instrumental Variables. Econometrica 26 (3):393–415.Google Scholar
Sarkees, Meredith Reid. 2000. The Correlates of War Data on War: An Update to 1997. Conflict Management and Peace Science 18 (1):123–44.Google Scholar
Sen, Amartya. 1973. On the Development of Basic Income Indicators to Supplement the GNP Measure. United Nations Economic Bulletin for Asia and the Far East 24.
Sen, Amartya. 1989. Food and Freedom. World Development 17 (6):769–81.Google Scholar
Sen, Amartya. 1999. Development as Freedom. New York: Knopf.
Shin, Doh G., and Jeffrey B. Williamson. 1989. Political Democracy and the Quality of Citizens' Lives: A Cross-National Study. Journal of Developing Societies 5:30–41.Google Scholar
Sirowy, Larry, and Alex Inkeles. 1990. The Effects of Democracy on Economic Growth and Inequality: A Review. Studies in Comparative International Development 25 (1):126–57.Google Scholar
Spalding, Nancy L. 1990. The Relevance of Basic Needs for Political and Economic Development. Studies in Comparative International Development 25 (3):90–115.Google Scholar
Stern, Nicholas. 1991. The Determinants of Growth. Economic Journal 101 (404):122–33.Google Scholar
Stewart, Frances. 1985. Basic Needs in Developing Countries. Baltimore: Johns Hopkins University Press.
Streeten, Paul, Shahid Javel Bruki, Mahbub ul Haq, Norman Hicks, and Frances Stewart. 1981. First Things First: Meeting Basic Needs in Developing Countries. New York: Oxford University Press.
Svensson, Jakob. 1999. Aid, Growth, and Democracy. Economics and Politics 11 (3):275–297.Google Scholar
Szal, Richard J. 1979. Popular Participation, Employment and the Fulfillment of Basic Needs. International Labor Review 118:25–37.Google Scholar
Trumbull, William N., and Howard J. Wall. 1994. Estimating Aid-Allocation Criteria with Panel Data. Economic Journal 104:876–82.Google Scholar
United Nations Conference on Trade and Development. 1997. International Investment Towards the Year 2001. New York.
United Nations Conference on Trade and Development. 2000. World Investment Report. Geneva.
United Nations Conference on Trade and Development. 2002. World Investment Report. Geneva.
United Nations Conference on Trade and Development. 2003. World Investment Report. Geneva.
United Nations Development Programme. 1990. Human Development Report. New York: Oxford University Press.
U.S. Arms Control and Disarmament Agency. Various editions. World Military Expenditures and Arms Transfers. Washington, D.C.
U.S. State Department/U.S. Agency for International Development. 2003. Strategic Plan for Fiscal Years 2004 to 2009. Washington, D.C.
von Braun, Joachim, and Patrick J. R. Webb. 1989. The Impact of New Crop Technology on the Agricultural Division of Labor in a West African Setting. Economic Development and Cultural Change 37 (3):513–34.Google Scholar
Wawro, Gregory. 2002. Estimating Panel Data Models in Political Science. Political Analysis 10 (1):25–48.Google Scholar
White, Halbert. 1980. A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity. Econometrica 48 (4):817–38.Google Scholar
Wolfe, Barbara L., and Jere R. Behrman. 1984. Determinants of Women's Health Status and Health-Care Utilization in a Developing Country: A Latent Variable Approach. Review of Economics and Statistics 4:696–703.Google Scholar
World Bank. 2004. World Development Indicators. Washington, D.C.
Zweifel, Thomas D., and Patricio Navia. 2000. Democracy, Dictatorship, and Infant Mortality. Journal of Democracy 11 (2):99–114.Google Scholar