Where Does the Money Flow? Understanding Allocations of Post-Epidemic Foreign Aid

ITFD master project by Ashley Do, Nicolas Legrain, Nadine Schüttler, and María Soares de Lima ’21

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Editor’s note: This post is part of a series showcasing BSE master projects. The project is a required component of all Master’s programs at the Barcelona School of Economics.

Abstract

The purpose of this paper is to examine aggregate and cross-sector allocations of foreign aid flows in the aftermath of epidemics and to determine whether latent effects can be observed in the following year.

Using data from the Organization for Economic Cooperation and Development (OECD) on Bilateral commitments of Official Development Assistance (ODA) from 2005-2019, we employ an Ordinary Least Squares (OLS) model based on the structural gravity framework to account for spatial interactions between donor and recipient countries.

Our results show that epidemics have a positive and significant effect on bilateral foreign aid across all sectors and that aid to the Humanitarian sector is less conditional on pre-existing relationships than others. Results for latent effects on aid vary by sector.

We further find that isolating epidemics in our analysis suggests that certain diseases prompt a different aid response wherein aid to non-health sectors falls.

Conclusions

We find that epidemics do indeed engender changes in foreign aid behavior.

  • To be specific, epidemics have a positive and significant effect on foreign aid commitments to all sectors. Our results are unable to shed light on the hypothesis of reallocation between sectors. However, they do illustrate that aid to both health-related and non-health-related sectors increases.
  • Aid in this context is also persistent. That is, our results, robust to numerous checks, show that the positive effects of epidemics may be observed not only in the year of the outbreak but also in the following year.
  • By analyzing each disease independently, we further find that certain diseases prompt a different aid response and may suggest the presence of a foreign-aid reallocation due to epidemics.

However, our study does not measure the effectiveness of aid which is necessary for the design of productive policy measures that could save countless lives. Naturally, this presents new opportunities for research and raises important questions regarding the optimal allocation of aid given shocks to global health. That is, does increasing aid to all sectors serve as an effective one-size-fits-all solution? Or would a more efficient policy consist of donors reallocating aid across sectors to account for short and long-term changes in the demand for healthcare caused by an epidemic?

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