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Department of Economics, University of Bergen Working Papers in Economics, Department of Economics, University of Bergen

No 03/17:
Aid dispersion: Measurement in principle and practice

Cathrin Fløgstad () and Rune Jansen Hagen ()

Abstract: Excessive dispersion of development assistance has been high on the Paris Agenda on aid effectiveness. However, there is no agreement in the existing literature on how aid dispersion should be measured and few studies of the extent of the problem. We argue for using the Theil Index for both recipients and donors. This relative inequality measure has a major advantage: it allows for a perfect decomposition into variation between and within entities. Exploiting this property, we can rank official donors and recipients not only in terms of the total spread, but also assess the contributions of geographic and sectoral dispersion. We provide a detailed picture of developments along various dimensions (globally as well as for countries, income groups, and regions, over 1998-2013). We further distinguish between bilateral and multilateral donors. Consistent with other studies using more limited samples, we find little effect of the Paris Agenda overall. Aid is more fragmented in Sub-Saharan Africa and in the poorest countries. Globally as well as for most donor and recipient countries, between variation is the main driver of the spread, lending support to the geographic concentration policies many donor countries have adopted. Bilateral aid has been somewhat more dispersed than multilateral aid and in both cases the large number of donors controlling similar shares of total funds is a major driver of the total spread. The latter suggests that concentration could also be achieved through a reduction of the number of actors on the donor side of the aid industry, a perspective that previous studies using other measures have been unable to capture.

Keywords: Foreign aid; aid dispersion; transaction COSTs; Paris Agenda; Theil Index; (follow links to similar papers)

JEL-Codes: F35; H87; (follow links to similar papers)

53 pages, April 19, 2017

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