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Abstract: This working paper by CGD research fellow David Roodman provides an introduction to a particular class of econometric techniques, dynamic panel estimators. The techniques and their implementation in Stata, a statistical software package widely used in the research community, are an important input to the careful applied research CGD advocates. The techniques discussed are specifically designed to extract causal lessons from data on a large number of individuals (whether countries, firms or people) each of which is observed only a few times, such as annually over five or ten years. These techniques were developed in the 1990s by authors such as Manuel Arellano, Richard Blundell and Olympia Bover, and have been widely applied to estimate everything from the impact of foreign aid to the importance of financial sector development to the effects of AIDS deaths on households. The present paper contributes to this literature pedagogically, by providing an original synthesis and exposition of the literature on these dynamic panel estimators, and practically, by presenting the first implementation of some of these techniques in Stata. Stata is designed to encourage users to develop new commands for it, which other users can then use or even modify. In this paper Roodman introduces abar and xtabond2, which is now one of the most frequently downloaded user-written Stata commands in the world. Stata's partially open-source architecture has encouraged the growth of a vibrant world-wide community of researchers, which benefits not only from improvements made to Stata by the parent corporation, but also from the voluntary contributions of other users. Stata is arguably one of the best examples of a combination of private for-profit incentives and voluntary open-source incentives in the joint creation of a global public good.
dynamic panel estimation, difference GMM, system GMM, Stata, Arellano-Bond, Blundell-Bond, generalized method of moments, autocorrelation
Abstract: The Burnside and Dollar (2000) finding that aid raises growth in a good policy environment has had an important influence on policy and academic debates. We conduct a data gathering exercise that updates their data from 1970-93 to 1970-97, as well as filling in missing data for the original period 1970-93. We find that the BD finding is not robust to the use of this additional data.
foreign aid, growth, policy
Abstract: The Burnside and Dollar (2000, AER) finding that aid raises growth in a good policy environment has had an important influence on policy and academic debates. We conduct a data gathering exercise that updates their data from 1970 -93 to 1970 -97, as well as filling in missing data for the original period 1970 -93. We find that the Burnside and Dollar (2002, AER) finding is not robust to the use of this additional data.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.
Abstract: CGD research fellow David Roodman and Uzma Qureshi analyze microfinance institutions (MFIs) as businesses, asking how some succeed in covering costs, earning returns, attracting capital, and scaling up. We draw on existing literature and interviews with industry players and academics. Key microfinance business challenges include building volume, keeping loan repayment rates high, retaining customers, and minimizing scope for fraud. Since the 1970s, microfinance innovators have developed clever solutions to these problems. Some have built huge organizations that serve thousands or millions of clients and have demonstrated an impressive capacity for changein countries, to boot, with weak infrastructure and human capital. The individual innovations have spread both through a Darwinian process of selection and through cultural diffusion. We examine three kinds of determinants of commercial success: product design, management, and environmental factors such as regulation. We conclude that much about how microfinance is delivered can be understood as responses to business imperatives. Indeed, the discoveries of techniques for cost-effective microfinance delivery are the real genius of microfinance, rather than the "discovery" that the poor can repay that dominates its public image. But by Occam's razor (simpler explanations are more plausible), the power of commercial imperatives to explain so many product design choices weakens an alternative explanation for them, namely that they are made primarily to help clients. These doubts point up the need for more rigorous impact evaluations of microfinance.
Microfinance
Abstract: CGD research fellow David Roodman and Uzma Qureshi analyze microfinance institutions (MFIs) as businesses, asking how some succeed in covering costs, earning returns, attracting capital, and scaling up. We draw on existing literature and interviews with industry players and academics. Key microfinance business challenges include building volume, keeping loan repayment rates high, retaining customers, and minimizing scope for fraud. Since the 1970s, microfinance innovators have developed clever solutions to these problems. Some have built huge organizations that serve thousands or millions of clients and have demonstrated an impressive capacity for change - in countries, to boot, with weak infrastructure and human capital. The individual innovations have spread both through a Darwinian process of selection and through cultural diffusion. We examine three kinds of determinants of commercial success: product design, management, and environmental factors such as regulation. We conclude that much about how microfinance is delivered can be understood as responses to business imperatives. Indeed, the discoveries of techniques for cost-effective microfinance delivery are the real genius of microfinance, rather than the "discovery" that the poor can repay that dominates its public image. But by Occam's razor (simpler explanations are more plausible), the power of commercial imperatives to explain so many product design choices weakens an alternative explanation for them, namely that they are made primarily to help clients. These doubts point up the need for more rigorous impact evaluations of microfinance.
Artificial states, political borders
Abstract: The launch of the Global War on Terror (GWOT) soon after September 11, 2001 has been predicted to fundamentally alter U.S. foreign aid programs. In particular, there is a common expectation that development assistance will be used to support strategic allies in the GWOT, perhaps at the expense of anti-poverty programs. In this paper we assess changes in country allocation by USAID over 1998-2001 versus 2002-05. In addition to standard aid allocation variables, we add several proxies for the GWOT, including the presence of foreign terrorist groups, sharing a border with a state sponsor of terrorism, troop contribution in Iraq, and relative share of Muslim population. We find that any major changes in aid allocation related to the GWOT appear to be affecting only a handful of critical countries, namely, Iraq, Afghanistan, Jordan, and the Palestinian Territories. The extra resources to these countries also seem to be coming from overall increases in the bilateral aid envelope, combined with declines in aid to Israel, Egypt, and Bosnia and Herzegovina. We do not find that any of our GWOT proxies (or their interactions) are significantly correlated with changes in country allocation of aid flows to the rest of the world, including to sub-Saharan African countries. Concerns that there is a large and systematic diversion of U.S. foreign aid from fighting poverty to fighting the GWOT do not so far appear to have been realized.
global war on terror, US foreign aid, security, international development
Abstract: The launch of the Global War on Terror (GWOT) soon after September 11, 2001 has been predicted to fundamentally alter U.S. foreign aid programs. In particular, there is a common expectation that development assistance will be used to support strategic allies in the GWOT, perhaps at the expense of anti-poverty programs. In this paper we assess changes in country allocation by USAID over 1998-2001 versus 2002-05. In addition to standard aid allocation variables, we add several proxies for the GWOT, including the presence of foreign terrorist groups, sharing a border with a state sponsor of terrorism, troop contribution in Iraq, and relative share of Muslim population. We find that any major changes in aid allocation related to the GWOT appear to be affecting only a handful of critical countries, namely, Iraq, Afghanistan, Jordan, and the Palestinian Territories. The extra resources to these countries also seem to be coming from overall increases in the bilateral aid envelope, combined with declines in aid to Israel, Egypt, and Bosnia and Herzegovina. We do not find that any of our GWOT proxies (or their interactions) are significantly correlated with changes in country allocation of aid flows to the rest of the world, including to sub-Saharan African countries. oncerns that there is a large and systematic diversion of U.S. foreign aid from fighting poverty to fighting the GWOT do not so far appear to have been realized.
aid, terrorism, development finance, US Policy
Abstract: The Difference and System generalized method of moments (GMM) estimators are growing in popularity, thanks in part to specialized software. But as implemented in these packages, the estimators easily generate results by default that are at once invalid yet appear valid in specification tests. The culprit is their tendency to generate instruments that are a) numerous and, in System GMM, b) suspect. A large collection of instruments, even if individually valid, can be collectively invalid in finite samples because they overfit endogenous variables. They also weaken the Hansen test of overidentifying restrictions, which is commonly relied upon to check instrument validity. This paper reviews the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it. It illustrates the dangers by replicating two early applications to economic growth: Forbes (2000) on income inequality and Levine, Loayza, and Beck (2000) on financial sector development. Results in both papers appear driven by previously undetected endogeneity.
difference GMM, system GMM, Hansen test, small-sample properties of GMM, financial
Abstract: The recent literature contains many stories of how foreign aid affects economic growth. Aid raises growth in countries with good policies, or with difficult economic environments, or outside the tropics, or on average but with diminishing returns. The diversity of the results suggests that many are fragile. Seven important aid-growth papers are tested for robustness, using 14 minimally arbitrary tests deriving mainly from differences among the studies themselves. This approach investigates the importance of potentially arbitrary specification choices while minimizing the arbitrariness in testing choices. All of the results appear fragile, especially to sample expansion.
F35, O23, O40
Abstract: Recent literature contains many stories of how foreign aid affects economic growth: aid raises growth in countries with good policies, or in countries with difficult economic environments, or mainly outside the tropics, or on average with diminishing returns. The diversity of these results suggests that many are fragile. I test 7 important aid-growth papers for robustness. The 14 tests are minimally arbitrary, deriving mainly from differences among the studies themselves. This approach investigates the importance of potentially arbitrary specification choices while minimizing arbitrariness in testing choices. All of the results appear fragile, especially to sample expansion.
Foreign assistance, economic growth, economic development, robustness testing
Abstract: The Commitment to Development Index (CDI) ranks 21 of the world's richest countries on their dedication to policies that benefit the five billion people living in poorer nations. Moving beyond simple comparisons of foreign aid, the CDI ranks countries on seven themes: quantity and quality of foreign aid, openness to developing-country exports, policies that influence investment, migration policies, stewardship of the global environment, security policies and support for creation and dissemination of new technologies. This year for the first time, CGD research fellow David Roodman extended the environment component of the Index to cover four of the biggest developing countries: Brazil, Russia, India and China, a group Goldman Sachs dubbed the BRICs. This working paper explores the indicators that make up the environment component (global climate, sustainable fisheries, and biodiversity and global ecosystems) and explains how the BRIC countries stack up to their right-country counterparts. He finds that the BRICs score remarkably well compared to the 21 rich countries covered by the Index: when thrown in with the usual 21, they rank second, fourth, fifth, and eleventh. They generally perform well on the greenhouse gas emissions, consumption of ozone-depleting substances, and tropical timber imports. And the BRICs have joined important international environmental accords. As a group, their major weakness is low gas taxes. In addition, Amazon deforestation and heavy fossil fuel use pull Brazil and Russia, respectively, below the CDI 21 average on greenhouse emissions per capita. China's abstention from the U.N. fisheries agreement puts it a half point below the other BRICs.
environment, Commitment to Development Index (CDI)
Abstract: The Commitment to Development Index of the Center for Global Development rates 21 rich countries on the "development-friendliness" of their policies. It is revised and updated annually. In the 2004 edition, the component on foreign assistance combines quantitative and qualitative measures of official aid, and of fiscal policies that support private charitable giving. The quantitative measure uses a net transfers concept, as distinct from the net flows concept in the net Official Development Assistance measure of the Development Assistance Committee, which does not net out interest received. The qualitative factors are three: a penalty for tying aid; a discounting system that favors aid to poorer, better-governed recipients; and a penalty or "project proliferation." The selectivity weighting approach avoids some conceptual problems inherent in the Dollar and Levin (2004) elasticity-based method. The proliferation penalty derives from a calibrated model of aid transaction cost developed in Roodman (forthcoming). The charitable giving measure is based on an estimate of the share of observed private giving to developing countries that is attributable to a) lower overall taxes (income effect) and b) specific tax incentives for giving (price effect). Despite the adjustments, overall results are dominated by differences in quantity of official aid given. This is because while there is a seven-fold range in net concessional transfers/GDP among the score countries, variation in overall aid quality across donors appears far lower, and private giving is generally small. Denmark, the Netherlands, Norway, and Sweden score highest while the largest donors in absolute terms, the United States and Japan, score in the bottom third. Standings by the 2004 methodology have been relatively stable since 1995.
foreign aid, international development
Abstract: The Commitment to Development Index of the Center for Global Development ranks the world's 21 richest countries on the "development-friendliness" of their policies. It is revised and updated annually. This working paper includes revisions from the methodology used to develop the 2004 CDI. The component on foreign assistance combines quantitative and qualitative measures of official aid, and of fiscal policies that support private charitable giving. The quantitative measure uses a net transfers concept, as distinct from the net flows concept in the net Official Development Assistance measure of the Development Assistance Committee. The qualitative factors are: a penalty for tying aid; a discounting system that favors aid to poorer, better-governed recipients; and a penalty for "project proliferation." The charitable giving measure is based on an estimate of the share of observed private giving to developing countries that is attributable to a) lower overall taxes or b) specific tax incentives for giving. Despite the adjustments, overall results are dominated by differences in quantity of official aid given. This is because while there is a seven-fold range in net concessional transfers/GDP among the scored countries, variation in overall aid quality across donors appears far lower, and private giving is generally small. Denmark, the Netherlands, Norway, and Sweden score highest while the largest donors in absolute terms, the United States and Japan, rank at or near the bottom. Standings by the 2005 methodology have been relatively stable since 1995.
microfinance
Abstract: At a time when the international dialogue surrounding development is focused on increasing the quantity of aid, this paper focuses on how the donor community can improve the quality of foreign assistance. The author discusses the problem of project proliferation, and the tendency of developing countries who receive aid to become overburdened by the costs of administering aid projects. Using a sophisticated mathematical modeling process, the author analyzes the relationship between total aid and recipient activity, and the distribution of projects by size. The conclusions hold insights for policy-makers: when projects proliferate beyond a certain point, the effective marginal utility of aid declines sharply, and can even become negative. This negative effect of aid on development can be especially true if the aid delivery process drifts away from the goal of poverty reduction. In practice, therefore, the author suggests that when countries reach their absorptive capacity, aid dollars given beyond that point lose much of their effectiveness. This paper is part of the Center for Global Development's ongoing work on aid effectiveness. To learn more about the potential negative effect of aid on development, and specifically institution-building, read Working Paper 71, "Fiscal Implications of Large Aid Increases."
Foreign aid, donor coordination, project proliferation, absorptive capacity
Abstract: The cross-country literature on foreign aid effectiveness has relied on the use of instruments to distinguish causality from mere correlation. This paper uses simple non-instrumental techniques in the spirit of Granger to demonstrate that the main aid-growth connection is a negative causal relationship from growth to aid - aid, that is, as a fraction of recipient GDP. Coarsely, when GDP goes up, aid/GDP goes down. The endogeneity of aid, long-suspected, is real. Less understood is that adding certain common controls to regressions puts this relationship through the looking-glass, flipping both its sign and apparent direction: aid seems to cause growth. Ideally, instrumentation expunges the endogeneity shown here. In practice, estimates of aid's impact have run into problems. Autocorrelation in the errors is widespread, and can render endogenous lagged variables used as regressors or instruments. The pitfalls of "difference" and "system" include invalidity and proliferation of instruments. Multicollinearity in term pairs of interest, such as aid and aid2 or "project" and "program" aid, can amplify endogeneity bias. The combination of specification problems and widespread fragility (shown in earlier work) leads to pessimism about the ability of cross-country econometrics to demonstrate aid effectiveness. This does not rule an average positive effect, nor does it contradict the fact that aid has saved millions of lives, but it does suggest that the average effect on economic growth is too small to be detected statistically.
foreign aid, effectiveness
Abstract: Like many public policy debates, that over whether foreign aid works carries on in two worlds. Within the research world, it plays out in the form of papers full of technical language, formulas, and numbers. Outside, the arguments are plainer and the audience broader, but those academic studies remain a touchstone. While avoiding jargon, this paper reviews recent, contending studies of how much foreign aid affects country-level outcomes such as economic growth and school attendance rates. This particular kind of study is ambitious: it is far easier to evaluate a school-building project, say, on whether the school was built and children filled its seats than to determine whether all aid, or large subcomponents of it, made the economy grow faster. Because of its ambition, this literature has attracted attention from those hoping for clear answers on whether aid works. On balance, the quantitative approach to exploring grand questions about aid effectiveness, which began 40 years ago, was worth trying and is probably worth pursuing somewhat further. But the literature will probably continue to disappoint as often as it offers hope. Perhaps the biggest challenge is going beyond documenting correlations to demonstrating causation - not just that aid went hand-in-hand with economic growth, but caused it. Aid has eradicated diseases, prevented famines, and done many other good things. But given the limited and noisy data available, its effects on growth in particular probably cannot be detected.
aid effectiveness
Global War on Terror (GWOT), September 11, foreign aid, terrorism, Iraq, muslim, poverty
Abstract: At the heart of many econometric models is a linear function and a normal error. Examples include the classical small-sample linear regression model and the probit, ordered probit, multinomial probit, Tobit, interval regression, and truncated distribution regression models. Because the normal distribution has a natural multidimensional generalization, such models can be combined into multi-equation systems in which the errors share a multivariate normal distribution. The literature has historically focused on multi-stage procedures for estimating mixed models, which are more efficiently computationally, if less so statistically, than maximum likelihood (ML). But faster computers and simulated likelihood methods such as the Geweke, Hajivassiliou, and Keane (GHK) algorithm for estimating higher dimensional cumulative normal distributions have made direct ML estimation practical. ML also facilitates a generalization to switching, selection, and other models in which the number and types of equations vary by observation. The Stata module CMP fits Seemingly Unrelated Regressions (SUR) models of this broad family. Its estimator is also consistent for recursive systems in which all endogenous variables appear on the right-hand-sides as observed. If all the equations are structural, then estimation is full-information maximum likelihood (FIML). If only the final stage or stages are, then it is limited-information maximum likelihood (LIML). CMP can mimic a dozen built-in Stata commands and several user-written ones. It is also appropriate for a panoply of models previously hard to estimate. Heteroskedasticity, however, can render it inconsistent. This paper explains the theory and implementation of cmp and of a related Mata function, ghk2(), that implements the GHK algorithm.
econometric model, STATA, CMP
Abstract: Researchers have written hundreds of papers on the causes and consequences of official foreign aid, while paying almost no attention to private overseas giving, by individuals, universities, foundations, and corporations. Yet private giving is significant - some $15.5 billion/year, compared to more than $60 billion/year in public giving - and is in no small part an outcome of public policy. In most rich countries, tax deductions and credits lower the "price" of charity to donors. And governments with low tax revenue/GDP ratios leave more money in private pockets for private charity. To correct the near-complete lack of information on this de facto aid policy, we survey officials of 21 donor nations on the use of tax incentives to promote private charity. From the results, we develop an index of the overall incentive for private charity, expressed as a percentage increase over the hypothetical giving level absent incentives. France's tax code creates the largest price incentive while those of Austria, Finland, and Sweden offer none. Factoring in the income effect of the tax ratio, Australia, Ireland, Germany, and the United States move to the top, with combined price and income effects sufficient to double private giving. As a result, tax policy appears to have nearly doubled private overseas giving from donor countries in 2003, from a counterfactual $8.0 billion. Two-thirds of the $7.5 billion increase occurred in the United States. Of that, nearly 40% appears to be U.S. charity to Israel. According to 21-country scatter plots, countries with lower church attendance and more faith in the national legislature have lower taxes (stronger income effect), but average levels of targeted tax incentives. Income (GDP/capita) does correlate with private overseas aid/capita, but also with public aid/capita, so that the two aid flows are complementary in magnitude.
Commitment to Development Index, CDI
Abstract: The Commitment to Development Index of the Center for Global Development rates 21 rich countries on the "development-friendliness" of their policies. It is revised and updated annually. In the 2005 edition, the component on foreign assistance combines quantitative and qualitative measures of official aid, and of fiscal policies that support private charitable giving. The quantitative measure uses a net transfers concept, as distinct from the net flows concept in the net Official Development Assistance measure of the Development Assistance Committee. The qualitative factors are: a penalty for tying aid; a discounting system that favors aid to poorer, better-governed recipients; and a penalty for "project proliferation." The charitable giving measure is based on an estimate of the share of observed private giving to developing countries that is attributable to a) lower overall taxes or b) specific tax incentives for giving. Despite the adjustments, overall results are dominated by differences in quantity of official aid given. This is because while there is a seven-fold range in net concessional transfers/GDP among the scored countries, variation in overall aid quality across donors appears far lower, and private giving is generally small. Denmark, the Netherlands, Norway, and Sweden score highest while the largest donors in absolute terms, the United States and Japan, rank at or near the bottom. Standings by the 2005 methodology have been relatively stable since 1995.
Commitment to Development Index, development aid, transfers, aid donor
Abstract: The most-noted studies on the impact of microcredit on households are based on a survey fielded in Bangladesh in the 1990s. Contradictions among them have produced lasting controversy and confusion. Pitt and Khandker (PK, 1998) apply a quasi-experimental design to 1991–92 data; they conclude that microcredit raises household consumption, especially when lent to women. Khandker (2005) applies panel methods using a 1999 resurvey; he concurs and extrapolates to conclude that microcredit helps the extremely poor even more than the moderately poor. But using simpler estimators than PK, Morduch (1999) finds no impact on the level of consumption in the 1991–92 data, even as he questions PK’s identifying assumptions. He does find evidence that microcredit reduces consumption volatility. Partly because of the sophistication of PK’s Maximum Likelihood estimator, the conflicting results were never directly confronted and reconciled. We end the impasse. A replication exercise shows that all these studies’ evidence for impact is weak. As for PK’s headline results, we obtain opposite signs. But we do not conclude that lending to women does harm. Rather, all three studies appear to fail in expunging endogeneity. We conclude that for non-experimental methods to retain a place in the program evaluator’s portfolio, the quality of the claimed natural experiments must be high and demonstrated.
microcredit, microfinance, Bangladesh, household consumption, women, non-experimental methods
Abstract: The proliferation of aid projects may overburden recipient governments with reporting requirements, donor visits, and other administrative overhead, siphoning off scarce domestic recipient resources, such as tax revenue or the time of skilled government officials, from directly productive use. But greater oversight may also improve the administration of projects, increasing development. I present a model of aid projects that reflects both sides of this coin. It posits a distinction between national-level governance and project-level governance. A donor can raise project-level governance above the baseline national level by requiring oversight activities of the recipient, although the benefits from doing so are less where national-level governance is already high. The model assumes that larger projects demand proportionally less oversight activity from the recipient. Comparative statics analysis suggests that to maximize development, projects should be larger where aid volume is higher, to avoid overburdening recipient administrative capacity; where recipient resources are scarcer, for the same reason; and where national governance is good, since the marginal benefit of oversight is then lower. A multi-donor generalization shows how donors that are imperfectly altruistic, caring most about the success of their own projects, will tend to sink into competitive proliferation, in which each donor subdivides its aid budget into smaller projects to raise the marginal productivity of the recipient's resources in those projects and attract them away from other donors. The inefficiency arises from the lack of a market among donors for recipient resources. In a Nash equilibrium, competitive proliferation reduces overall development. But the smallest (selfish) donors can gain. This would discourage them from cooperating with other donors to contain competitive proliferation.
aid effectiveness, International Financial Institutions
Abstract: A challenge in the development of aggregate indexes of trade protection is weighting individual tariffs in ways that (a) reflect their importance and (b) are not endogenous to the protection being measured. The most obvious basis for weights is actual imports; but these may be highly endogenous. Various authors have worked to correct this endogeneity. For example, in the Bouët et al. (2004) 'MAcMap' data set, weights are based on imports of reference groups of countries. But eliminating the endogeneity is difficult in product areas where protection is high and widespread. I develop a new set of estimates of overall protection in rich countries with respect to developing ones that eschews import weights as much as possible in favour of weights based on the value of exporter's total production. The results are generally higher than those of Bouet et al. Product areas in which protection is high and widespread seem systematically de-emphasised when using MAcMap weights, especially in agriculture. I also estimate tariff equivalents of trade-distorting subsidies by country and commodity. Agricultural tariffs dominate subsidies in trade-distorting effect, and agricultural protection in turn dominates goods protection generally. Japan is most protective, largely because of rice tariffs near 900 per cent, followed by Norway and Switzerland. Because of their greater reliance on agriculture, the poorest countries face the highest barriers, despite tariff preferences.
Abstract: A challenge in the development of aggregate indexes of trade protection is finding weights to put on various tariffs that a) reflect their importance to exporters and b) are not endogenous to the protection being measured. One common basis for weights is actual imports; but these, as is well-known, are endogenous. Various authors have worked to correct this endogeneity, but doing so is difficult in product areas where protection is both high and widespread. For this reason, I develop a new set of estimates of overall protection in rich countries with respect to developing ones that eschews import weights as much as possible in favor of weights based on the value of exporter's total production in each product area. The results are generally much higher than those from the Bouët et al. (2004) "MAcMap" data set; there, weights are based on imports of large reference groups of countries. I conclude that product areas in which protection is high and widespread are systematically de-emphasized when using pure MAcMap weights to aggregate across major product groups. In particular, when gauging rich-country protection with respect to developing countries, agriculture is de-emphasized. I also develop estimates of trade-distorting subsidies by country and commodity and translate these into tariff equivalents with the methodology of Cline (2004) in order to estimate overall protection levels. Agricultural tariffs dominate subsidies in trade-distorting effect, and agricultural protection in turn dominates goods protection generally. Japan is most protective, largely because of rice tariffs near 900%, followed by Norway and Switzerland. Because of their greater reliance on agriculture, the poorest countries face higher trade barriers than wealthier developing countries, despite tariff preferences.
agricultural subsidies, tariffs, aggregate protection, Doha Round
Abstract: The difference and system generalized method of moments (GMM) estimators are growing in popularity. As implemented in popular software, the estimators easily generate instruments that are numerous and, in system GMM, potentially suspect. A large instrument collection overfits endogenous variables even as it weakens the Hansen test of the instruments joint validity. This paper reviews the evidence on the effects of instrument proliferation, and describes and simulates simple ways to control it. It illustrates the dangers by replicating Forbes [American Economic Review (2000) Vol. 90, pp. 869-887] on income inequality and Levine et al. [Journal of Monetary Economics] (2000) Vol. 46, pp. 31-77] on financial sector development. Results in both papers appear driven by previously undetected endogeneity.
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