Aid, Eligibility Rules and Manipulation of Reported Income Levels
Abstract: Beginning in 1987, a major criterion for eligibility for the World Bank’s concessionary IDA loans and grants has been whether or not a country is below a certain threshold on per capita income. The effects of this rule on total aid from all donors are not obvious. Other donors might view a relatively steep and sudden decline in IDA as an overreaction to a relatively small and gradual increase in income, and compensate for much of the decline in IDA aid by increasing aid to recipients after they exceed the threshold. On the other hand, other donors might view crossing the threshold as a signal that countries are in less need of aid, and reinforce the (negative) effects of graduation from IDA (and regional development bank funds) on aid levels. We show in this paper that the latter effect dominates the former. Using panel data with country fixed effects, we show that aid from the DAC bilateral donor countries is significantly reduced after countries cross the income threshold, controlling for other determinants of aid including a continuous measure of per capita income. Therefore, crossing the income threshold for IDA eligibility turns out to be a strong predictor of total aid levels. Because crossing the income threshold for IDA eligibility significantly reduces aid levels from other donors as well as the World Bank, government officials in recipient countries may have an incentive to manipulate their national accounts data to understate their per capita income levels, as their income levels approach the IDA threshold. Preliminary tests indicate underreporting is likely rare, as there is no evidence of significant "bunching" of observations just below the income threshold.
