Official development assistance, social capital and growth in Latin America

Abstract

This study focuses on the relationship among official development assistance (oda), social capital and economic growth in Latin American countries, attempting to determine whether the impact of such assistance on growth is conditional on the receiving country's stock of social capital. To this end, we use "trust" to measure social capital in an unbalanced panel of 18 Latin American countries over the period [2001][2002][2003][2004][2005][2006][2007][2008][2009][2010]. After accounting for country and time effects in a dynamic panel data model, our results show that the impact of oda on growth is indeed conditional on the level of trust that exists. This suggests that this assistance will be more effective when used in a trust-rich environment. The effectiveness of official development assistance (oda) has been the subject of numerous empirical studies. However, the impact it is expected to have on growth in receiving countries continues to be an object of debate (Easterly, 2008;Gibson and others, 2009). Several of these studies have also looked at other factors, such as institutions or social relationships, that may have an impact on the effectiveness of oda and hence could indirectly promote or hinder the growth process. For example, Burnside and Dollar (2000) find that the potential for oda to have a positive impact on growth depends on the presence of sound fiscal, monetary and trade policies. Kaufmann, Kraay and Zoido-Lobatón (1999) propose six indicators of governance that they believe can function as important oda selection criteria. Rivera-Batiz (2002) notes that governance-improving democracy increases growth by reducing corruption. Choritz (2002), Simon and McGillivray (2003) and Knack (2001) find that a better understanding of the region's existing social capital and other drivers of growth needs to be achieved prior to the implementation of development policies and projects. Baliamoune-Lutz and Mavrotas (2009) study whether social capital and institutions enhance the effectiveness of oda. Apart from this last paper, which suffers from some limitations, the literature does not provide any other empirical evidence regarding the macroeconomic effect of social capital on the effectiveness of oda. 1 An application of the basic two-gap model (Chenery and Strout, 1966) indicates that oda is required in order to close the savings-investment gap in poor countries. Therefore, when aid is used to finance productive investment, it can be expected to have a positive impact on growth. However, the decision to use oda for productive investment, along with its subsequent effect on growth, may be influenced by the levels or quality of a given country's social capital. KEYWORDSFollowing Burnside and Dollar (2000) and Baliamoune-Lutz and Mavrotas (2009), this study looks at 1 Other authors, such as Knowles (2007), have studied the effect of social capital on the allocation of aid; this area of inquiry is beyond the scope of this paper, however.whether the impact of oda on growth is conditional on the receivi...