Need, Merit and Politics in Multilateral Aid Allocation: A District‐level Analysis of World Bank Projects in India

• Author: Hannes Öhler,Peter Nunnenkamp,Maximiliano Sosa Andrés
• DOI: http://doi.org/10.1111/rode.12259
• Date: 01 February 2017
• Published date: 01 February 2017

Need, Merit and Politics in Multilateral Aid

Allocation: A District-level Analysis of World Bank

Projects in India

Peter Nunnenkamp, Hannes

€

Ohler, and Maximiliano Sosa Andr

es

*

Abstract

We assess the targeting of foreign aid within recipient countries by employing Poisson estimations on the

determinants of the World Bank’s allocation of project aid at the district level in India. The evidence of

needs-based location choices is very weak as long as the poverty orientation of overall commitments is

taken as the yardstick. It is only for some sectors that we find stronger indications of needs-based

allocation when combining sector-specific commitments with corresponding measures of need. The

evidence for a merit-based allocation of World Bank aid is even weaker. We typically do not find

evidence that aid allocation is affected by political patronage at the state or district level. However, the

World Bank prefers districts where foreign direct investors may benefit from projects related to

infrastructure.

1. Introduction

In 1990 more than nine out of ten of the world’s poorest ... lived in poor countries.

Now, three quarters live in middle-income states such as China, India and Brazil. This is

a problem for the World Bank because it mostly still lends to poor countries, not poor

people. (The Economist, 21 April 2012)

Donors have often been criticized for insufficient targeting of foreign aid. In

particular, donor selectivity in terms of favoring needy and deserving recipients

appears to be weak according to earlier studies such as Alesina and Dollar (2000)

and Alesina and Weder (2002).

1

The typical defense line of donors is that

essentially all empirical studies assess aid allocation across countries. The highly

aggregate level of recipient countries may disguise that poverty affects large

segments of the population within countries whose average income level is well

above subsistence levels. Furthermore, the quality of governance may differ within

countries so that some local administrations may put aid to productive use, whereas

other local administrations do not merit aid.

*Nunnenkamp (Corresponding author): Kiel Institute for the World Economy, Kiellinie 66, 24105 Kiel,

Germany. Tel: +49-431-8814209; E-mail: peter.nunnenkamp@ifw-kiel.de. €

Ohler: German Development

Institute, Tulpenfeld 6, 53113 Bonn, Germany. Sosa Andr

es: Ministry of Finance, 91600, Montevideo,

Uruguay. The authors would like to thank two anonymous reviewers for constructive criticism and most

helpful suggestions. They are also grateful to Katrin Mauch, Diana Muncaciu and Michaela Rank who

provided excellent research assistance. Uwe Deichmann kindly provided them with World Bank data on

the minimum travel time from Indian districts to the ten most important economic centres in the

country. The authors thank Christian Bjørnskov, Axel Dreher, Andreas Fuchs, Chris Muris, Rainer

Thiele, Krishna Chaitanya Vadlamannati, seminar participants at Heidelberg University and the Beyond

Basic Questions Workshop (Schiermonnikoog 2012) for valuable comments. Financial support from the

German Research Foundation (DFG GZ: DR 640/2-2) is gratefully acknowledged.

Review of Development Economics, 21(1), 126–156, 2017

DOI:10.1111/rode.12259

©2016 John Wiley & Sons Ltd

The geography of foreign aid within recipient countries is largely unexplored

territory.

2

Donors typically do not reveal the precise location of their aid projects.

However, AidData in collaboration with the World Bank provides a project- and

location-specific database covering projects in various recipient countries.

3

We

combine the project-related information offered by AidData with the exceptionally

rich data reflecting economic, institutional and political conditions available for 620

districts in 28 Indian states and seven Union territories.

4

The case of India is

particularly relevant to assess the within-country allocation of aid. The vast country

is characterized by striking regional disparities which should have affected the

location of aid projects. India is still classified as a lower-middle income country by

the World Bank and has traditionally been among the major recipients of foreign

aid. As a so-called blend country until 2014, India was eligible for highly

concessional funding by the International Development Agency (IDA) as well as

for International Bank for Reconstruction and Development (IBRD) loans. During

2006–2010 IDA directed almost 14% of its overall aid commitments to India, the

highest share among all recipient countries. Conversely, IDA ranked second

(behind Japan) among India’s donors of official development assistance (ODA),

contributing 30% to ODA commitments from all sources over the period 2006–

2010. IBRD loans to India, which are subsumed under other official flows (rather

than ODA), amounted to US$12 billion during the same period, making the

country the third largest IBRD borrower behind Mexico and Brazil.

5

By analyzing the allocation of World Bank projects within India we extend the

aid allocation literature in several ways. First of all, we account for need and merit

at the regional level to overcome the limitations of cross-country studies. Wide gaps

in terms of average income and poverty levels prevail within India. Average per-

capita income in Bihar was just one-fifth of average per-capita income in

Maharashtra in 2005/06 and the following years. While almost 47% of the

population of Orissa was living below the poverty level, this share was below 10%

in Punjab (Chaudhuri and Gupta, 2009). At the district level, the poverty incidence

in Orissa varied between 5% in Jaipur and 81% in Nowarangpur. Likewise, there

are striking regional differences with regard to governance and stability. According

to the World Bank’s Enterprise Survey in 2014, corruption was most pervasive in

Jammu and Kashmir, Jharkhand and Rajasthan with bribes requested for more

than half of public transactions, whereas only 3% of public transactions were

affected in Karnataka. At the same time, the frequency of riots per million

inhabitants in 2006 varied within Karnataka by a factor of four between the

districts of Dakshin (South) Kannada and Uttara (North) Kannada.

6

Hence, our

first objective is to assess whether the World Bank adhered to its own insights—

according to which aid tends to be more effective in poor environments with better

governance (World Bank, 1998)—when distributing its project aid within India.

Another contribution is that we take spatial considerations into account. We assess

whether World Bank aid tends to cluster regionally, either through previous projects

encouraging further projects in the same district or through spatial effects, i.e. aid

commitments in neighboring districts affecting one another. Spatial effects may be

expected particularly if poverty and governance conditions are similar in neighboring

districts. It may also be cost efficient for the World Bank to allocate additional

projects to where it already has a presence and previous project experience,

7

while

regional bodies within India may compete for World Bank projects.

We also aim at evaluating the impact of political factors at the state and district

level on the allocation of World Bank aid. Arguably, the distribution of World Bank

ALLOCATION OF WORLD BANK PROJECTS IN INDIA 127

©2016 John Wiley & Sons Ltd