Research of Members

Steinkamp, Sven and Frank Westermann, „Development aid and illicit capital flight: Evidence from Nepal“, The World Economy, September 2021, DOI: 10.1111/twec.13208.

Source: Figure from working paper version (IEW WP #121)

While illicit capital flight is a major concern of policymakers in developing countries, there is only little research on the possible link between capital flight and development aid. In this paper, we address the issue for Nepal, a stereotypical financially closed developing economy that is highly dependent on resources from abroad. Distinguishing features of our approach are the use of a narrowly defined proxy of capital flight, based on trade cost-adjusted mirror trade statistics, and the focus on the foreign-exchange cash component of development aid. We document a robust partial correlation between aid and outward capital flight that is economically and statistically significant. Interestingly, this positive correlation is not observable for remittances, an alternative form of foreign-exchange inflows where the capital flight motivation is absent. Furthermore, it is visible in the FX cash component but not in broader aid definitions that include in-kind transfers, or in multilateral and IMF loans. Finally, when comparing the subcomponents of export underinvoicing and import overinvoicing, only the latter is driving our results.

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Budjan, Angelika J., and Andreas Fuchs (2021). Democracy and Aid Donorship. American Economic Journal: Economic Policy, Volume 13, Issue 4, Pages: 217–38.

Almost half of the world's states provide bilateral development assistance. While previous research takes the set of donor countries as exogenous, this article introduces a new dataset on aid giving that covers all countries in the world, both rich and poor, and explores the determinants of aid donorship. It argues and shows empirically that democratic institutions support the setup of an aid program in richer countries but undermine its establishment in poorer countries. The findings hold in instrumental-variable regressions and the pattern is similar for the amount of aid.

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Toman Barsbai, Dieter Lukas and Andreas Pondorfer. Local Convergence of Behavior across Species. Science (2021)

Credit: Brian Wood

We find that foraging humans forage, reproduce, share parenting, and even organise their social groups in similar ways as surrounding mammal and bird species, depending on where they live in the world. Our results imply that local environments exert a key influence on how foraging human populations and non-human species behave, despite their very different backgrounds. Local environmental conditions select for similar foraging, social, and reproductive behaviors across human foragers and non-human animals, driving behavioral diversity worldwide.

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Axel Dreher, Andreas Fuchs, Bradley Parks, Austin Strange, and Michael J. Tierney (2021). Aid, China, and Growth: Evidence from a New Global Development Finance Dataset. American Economic Journal: Economic Policy, Volume 13, Issue 2, Pages: 1–40.

China has become a major source of global development finance, but the nature and consequences of its official financing activities are poorly understood. The absence of systematic evidence and rigorous analysis on the economic growth effects of Chinese development finance represents a major blind spot in the literature. This article introduces a new dataset of official financing from China to 138 developing countries between 2000 and 2014. This allows us then to investigate whether Chinese development finance affects economic growth in recipient countries. The results demonstrate that Chinese development finance boosts short-term economic growth. An additional project increases growth by between 0.41 and 1.49 percentage points two years after commitment, on average. These effects persist across different aid sectors and appear to be driven by increases in investment and - to a lesser extent - consumption. While this study does not find that significant financial support from China impairs the overall effectiveness of aid from Western donors, aid from the United States tends to be more effective in countries that receive no substantial support from China. Overall, this evidence should allay some of the fears that policymakers have expressed about China acting as “rogue donor” that undermines the effectiveness of Western assistance.

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Elías Cisneros, Krisztina Kis-Katos and Nuryartono, Nunung (2021): Palm oil and the politics of deforestation in Indonesia, Journal of Environmental Economics and Management,

This paper studies the interactions between political and economic incentives to foster forest conversion in Indonesian districts. Using a district-level panel data set from 2001 to 2016, we analyze variation in remotely sensed forest losses as well as measures of land-use licensing. We link these outcomes to political incentives arising before idiosyncratically-timed local mayoral elections as well as to price exposure measures based on oil palm soil suitability combined with global price variations for palm oil. Empirical results document increases of about 4% in deforestation in the year prior to local mayoral elections on average. Additionally, palm oil plays a crucial role in driving deforestation dynamics. Deforestation rates increase by 7% in places that experience a one standard deviation increase in local price exposure, but no upcoming elections. These effects are amplified to almost 19% larger forest losses in places that experience pre-election years and a standard deviation higher palm oil price exposure at the same time. We thus find clear evidence for economic and political incentives reinforcing each other as drivers of forest loss and land conversion for oil palm cultivation.

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Menusch Khadjavi, Kacana Sipangule Khadjavi, and Rainer Thiele (2021). Social Capital and Large-Scale Agricultural Investments: An Experimental Investigation. The Economic Journal, Volume 131, Issue 633, Pages 420–449

Following the 2007–2008 global food crisis, agricultural producers have invested in large tracts of land in developing countries. We investigate how the arrival of large-scale farms changes inter-personal trust and reciprocity, important components of social capital, in traditional Zambian villages. Using experimental methods, we elicit trust and reciprocal behaviour in villages that lie near large-scale farms and compare them with control villages at a distance. Our data reveal greater trust in villages close to large-scale farms, which is in line with communal coping as a response to the arrival of the large farms. Reciprocity is more frequent after farm employment, which points to reputation building.  

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Danzer, Alexander M., Robert Grundke (2020). „Export price shocks and rural labor markets: The role of labor market distortions.” Journal of Development Economics, 2020, Volume 145, 102464

Interview with a group of field workers in the Konibodom district in northern Tajikistan
© Robert Grundke

Can workers in developing countries take advantage of trade? Alexander M. Danzer (KU Eichstätt-Ingolstadt) and Robert Grundke (OECD) answer this question by using fluctuations in the world market price for cotton and identifying the effects of higher export prices on the wages of poor agricultural workers in the cotton harvest, using the example of Tajikistan. The increased demand for workers during the high price episode doubles wages for cotton pickers on small private farms, but has no impact on wages on large parastatal farms. The different treatment of workers is due to market power and the continued use of coerced labor in large companies during the cotton harvest, not least of school children and university students. The research concludes that trade produces winners and losers based on the political power relations between local decision makers and managers of parastatal farms.

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Heß, Simon, Dany Jaimovich, and Matthias Schündeln. "Development projects and economic networks: Lessons from rural Gambia." The Review of Economic Studies (2021)

The authors study the effect of participatory development projects on social and economic networks in rural villages in The Gambia. Participatory development projects actively involve villagers in financing and decision-making processes, intending to create more effective projects and to strengthen local institutions. These projects, in particular Community-Driven Development (CDD) projects, are a major form of international donor activity. As of March 2021, the World Bank alone supports 327 CDD projects in 90 countries, lending over 33 billion US$. Thus, it is important to understand the effects of such projects on local communities. Existing research on the intended effects of CDD projects is limited in breadth and typically finds moderate positive effects at best. At the same time, CDD projects risk having unintended negative effects, e.g. through their interactions with local power structures and decision-making mechanisms, or through unequally distributed benefits.

The authors first argue theoretically that the effects of CDD projects on decision-making processes and unequal economic outcomes can translate into effects on social and economic networks. To study the effect of CDD projects on networks empirically, the authors utilize the random allocation of a CDD project to villages in The Gambia. They collected detailed data on social and economic interactions in 56 villages, half of which had received CDD projects in the past. The central empirical finding is that the density of social and economic networks in program villages is lower than in non-program villages. Given the importance of these informal networks for risk-sharing (e.g., in case of an illness), the reduced density of networks implies a negative effect on expected household welfare. Further empirical analyses suggest that elite capture (i.e., the appropriation of project gains by village elites) contributed to the problem of unequally distributed benefits from the project, which in turn led to conflicts, thus weakening the networks. Overall, the results demonstrate possible unintended negative consequences of participatory development projects.

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“Is There a Rainbow after the Rain? How Do Agricultural Shocks Affect Non‐Farm Enterprises? Evidence from Thailand” (Katharina Grabrucker and Michael Grimm, both from the University of Passau), published in the American Journal of Agricultural Economics

The authors merged detailed household panel data from the TVSEP with grid‐level precipitation data to study the indirect effects of rainfall shocks on non‐farm enterprises in rural Thailand. They focus on both forward and backward linkages along the value chain as well as direct demand effects through farmer’s consumption. Overall, their analysis shows that the costs of agricultural shocks are higher than what much of the literature has suggested so far. Despite limited market integration in poor rural economies, the spill-overs are sizable and are transmitted through various channels. One implication is that safety nets targeted at farms may need to consider non‐farm enterprises too.

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