Budget Support ODA: The Rationale Behind and its Actual Allocation Determinants

Abstract

The ultimate goal of the paper is to design an economic framework that properly organizes the determinants of budget support and presents empirical results reflecting the modeling. The results seem to support the models prediction about the eligibility stage and the budget support ratio selection, not perfectly but considerably. Both in the model and in the empirical analysis, the total amount of ODA (Official Development Assistance) demonstrated a significant impact on the eligibility, although it had an ambiguous effect on the ratio choice. Furthermore, the findings indicate that governance indicators positively affect both stages, which is parallel to the framework. Besides, the model and the econometric results tell us that new emerging donors tend to be reluctant to place a higher ratio of their money upon the budget support modality. Lastly, the bilateral ODA relationship affects the eligibility stage positively and the ratio stage negatively, as predicted in the model. When it comes to governance, similar to Kaufmann et al. (2011), this paper divides governance into three categories: (1) low corruption and fungibility risk, (2) political stability and (3) formulation of sound policies

it was revealed that the most robust factor is different in each part. In the eligibility part, political stability is the most critical element, while low corruption and fungibility risk is the most influential in the ratio stage. This result shows the reluctance of donors towards budget support is still prevalent even among DAC (Development Assistance Committee) countries that use the new modality.