A conceptual note on accounting for budget internalities in public policy making
In a recent paper, Fleming, Heinecke and Dollery (2007) developed the government failure taxonomic system advanced by Charles Wolf into a conceptual framework to incorporate positive and negative internalities for analyzing public programs and policies. However, their paper unfortunately ignored the treatment of budget internalities, often an important question in real-world policy applications. This neglect is remedied in the present note by extending the analytical framework to include this important type of internal cost.
An analytical framework for assessing the impact of internalities on policy and projects using examples from Papua New Guinea
The government failure paradigm is nowadays an integral part of modern policy analysis. Several taxonomic models of government failure have been advanced, perhaps most notably the theory of ‘non-market’ failure developed by Charles Wolf. This model identifies four main sources of socially sub-optimal policy outcomes consequent upon the failure of public agencies, including ‘internalities’. Using examples drawn from the Australian foreign aid environment in Papua New Guinea, this paper develops a conceptual framework for incorporating positive and negative internalities into the analysis of the impact of aid on development projects, programs and policies. It is argued inter alia that previous work has neglected the significance of these internalities.
Aid, Policies, and Growth: Revisiting the Evidence
The authors revisit the relationship between aid and growth using a new data set focusing on the 1990s. The evidence supports the view that the impact of aid depends on the quality of state institutions and policies. The authors use an overall measure of institutions and policies popular in the empirical growth literature. The interaction of aid and institutional quality has a robust positive relationship with growth that is strongest in instrumental variable regressions. There is no support for the competing hypothesis that aid has the same positive effect everywhere.The authors also show that in the 1990s the allocation of aid to low-income countries favored those with better institutional quality. This"selectivity"is sensible if aid in fact is more productive in sound institutional and policy environments. The cross-country evidence on aid effectiveness is supported by other types of information as well: case studies, project-level evidence, and opinion polls support the view that corrupt institutions and weak policies limit the impact of financial assistance for development.