Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. =Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable. = # Geopolitical Payoffs Authors: Andrei A. Levchenko, Nitya Pandalai-Nayar, Henry Young Discussant: Jesús Fernández-Villaverde Video: https://www.youtube.com/watch?v=U_ssYRB6uPs&t=20925s ## Talk (05:48:45 – 06:19:37) [05:48:47] in and it most ring me two minutes behind [05:48:49] that's actually just relax [05:48:54] 6, 8, 6, 8, 30 [05:48:56] alright [05:48:58] Chenzi I'm looking at you everyone come on [05:49:05] Chenzi come on [05:49:08] I'm in budget [05:49:10] alright we are very excited to have [05:49:12] Andre here to tell us about [05:49:14] geopolitical payoffs you have 30 minutes [05:49:16] great [05:49:18] thank you very much for having me it's a real pleasure to be here [05:49:20] this joint work with Henry [05:49:22] Young who is right there [05:49:24] and Nitya Pandelayar who is not [05:49:26] what [05:49:28] what [05:49:30] what [05:49:32] let me just say [05:49:34] that you know this [05:49:36] the conferences remind me a bit of this cooking [05:49:38] show on TV where [05:49:40] four chefs are given [05:49:42] same four ingredients [05:49:44] and they're asked to cook something [05:49:46] and [05:49:50] they inevitably cook [05:49:52] different things I hope [05:49:54] so we'll see [05:49:56] I promise you a different dish [05:49:58] but [05:50:00] but we'll see alright [05:50:02] so we're entering [05:50:04] a new era of geopolitics [05:50:06] in which [05:50:12] you know there's increased great power competition [05:50:14] and during this competition [05:50:16] countries [05:50:18] engage in [05:50:20] costly actions [05:50:22] such as you know sanctions [05:50:24] fornaid flows [05:50:26] forming alliances and so on these actions [05:50:28] have a [05:50:30] have a cost of an explicit one to the [05:50:32] countries doing them [05:50:34] but [05:50:37] it's not always clear [05:50:39] what are the economic payoffs [05:50:41] of costly actions [05:50:43] so [05:50:45] you know this literature has been very active [05:50:47] but it's very often the case [05:50:49] that [05:50:51] the benefits of these actions [05:50:53] are put kind of directly into the utility function [05:50:55] right I may have [05:50:57] preferences of another [05:50:59] welfare of another country explicitly my preferences [05:51:01] or I may experience a dislike [05:51:03] shock [05:51:05] for some country [05:51:07] in the next period [05:51:09] and so I'm going to do something [05:51:11] today to prepare for it [05:51:13] and so [05:51:15] we want to kind of [05:51:17] depart from that a little bit [05:51:19] and try to understand with some [05:51:21] measurement what are the economic payoffs [05:51:23] of costly geopolitical actions [05:51:25] and we're going to evaluate a particular hypothesis [05:51:29] which is that [05:51:31] these geopolitical actions [05:51:33] increase the market access [05:51:35] of the country that's undertaking them [05:51:37] so [05:51:41] this [05:51:43] this [05:51:45] we're going to then [05:51:47] focus on one particular [05:51:49] geopolitical action [05:51:51] which is foreign aid [05:51:53] the foreign aid is in a sense the lowest [05:51:55] hanging fruit because it's directly [05:51:57] measurable and it is [05:51:59] in dollar terms [05:52:01] so we [05:52:03] can observe in a sense [05:52:05] a cost to a country of [05:52:07] doing something with respect to another [05:52:09] country bilaterally [05:52:12] and that leads us of course to a secondary [05:52:14] motivation behind the paper which is that [05:52:16] there's big things happening [05:52:18] in the aid world the US [05:52:20] has dismantled USAID [05:52:22] and [05:52:24] we can also kind of see what aid does [05:52:26] to the welfare of the countries [05:52:28] that are disbursing them [05:52:32] so [05:52:34] we're going to do three things [05:52:36] in this paper [05:52:38] the first is we're going to collect [05:52:40] some data set on bilateral aid [05:52:42] this is actually going to be [05:52:44] some of the same data that [05:52:46] the paper earlier this morning had [05:52:48] so we're going to go to the same [05:52:50] CIA handbooks and get the data [05:52:52] for USSR and China [05:52:54] but then we're going to have [05:52:56] also aid from the [05:52:58] Western countries [05:53:00] that's coming from the OECD aid [05:53:02] database so that's going to give us [05:53:04] 26 donor countries [05:53:06] and 133 [05:53:08] recipients and we're going to focus on the Cold War period [05:53:10] so our data are going to [05:53:12] run from 1960s to [05:53:14] the fall of the Berlin Wall [05:53:16] then [05:53:20] a necessary condition for aid to [05:53:22] improve market access is that aid increases [05:53:24] trade [05:53:26] so we're going to run some regressions [05:53:28] to see whether [05:53:32] aid from a particular donor [05:53:34] to a particular recipient [05:53:36] also leads to [05:53:38] increased exports from the donor [05:53:40] to the recipients right that's [05:53:42] the notion of increasing market access of the donor [05:53:44] and [05:53:46] we do find that that's the case so [05:53:48] a dollar of aid [05:53:50] increases donor exports to the recipient [05:53:52] by something like [05:53:54] 46 cents contemporaneously and by something like [05:53:56] a dollar 40 [05:53:58] at a five year horizon [05:54:00] we're also going to show that aid [05:54:02] reduces the [05:54:04] bilateral deep political distance [05:54:06] from the earlier today in a different paper [05:54:08] and then we're going to [05:54:10] have some results that suggest that also [05:54:12] may crowd out [05:54:14] market access of a rival block so when the [05:54:16] US gives aid to a particular country [05:54:18] it seems to also reduce [05:54:20] somewhat [05:54:22] that the recipient seems to also reduce [05:54:24] somewhat the imports [05:54:26] from the rival [05:54:28] blocks or from the Soviet Union [05:54:30] controlling for the usual [05:54:32] multiliter resistance so it's kind of over [05:54:34] the resistance [05:54:36] okay so that's a bit [05:54:38] the necessary condition if we're going [05:54:40] in search of market access [05:54:42] it better be the case that aid [05:54:44] increases trade so we find that it does [05:54:46] qualitatively [05:54:48] but then what we really want [05:54:50] is some evidence that [05:54:52] it may be self [05:54:54] interested from the donor perspective [05:54:56] that the benefits of this market access [05:54:58] are large enough to justify [05:55:00] the aid [05:55:02] outlays [05:55:04] and that we cannot do purely with data [05:55:06] so we're going to set up a multi-country [05:55:08] trade model [05:55:10] that calibrated to this [05:55:12] to this data set of [05:55:14] 26 [05:55:16] donor and about 100 recipients [05:55:18] during the Cold War period [05:55:20] and we're going to simulate [05:55:22] what happens when aid is cut [05:55:24] so we're going to take an 86% [05:55:26] aid cut just because that's what [05:55:28] the US did just now [05:55:30] and it turns out that [05:55:34] there is some benefit [05:55:36] of this increased market access [05:55:38] but in the end it's not enough [05:55:40] so the direct cost of aid [05:55:42] is higher than the market [05:55:44] access benefit [05:55:46] that the US gets from [05:55:48] this aid [05:55:50] in a baseline [05:55:52] result the market access benefit [05:55:54] offsets about [05:55:56] 25 to 30% of the [05:55:58] direct cost of aid [05:56:02] then we're going to [05:56:04] perform a broader search [05:56:06] for these benefits so we're going to look at [05:56:08] also USSI and all the other [05:56:10] 24 donors [05:56:12] and [05:56:14] we're going to look both at the donor level [05:56:16] so maybe the US [05:56:18] aid doesn't pay for itself [05:56:20] but maybe belgian aid pays for itself [05:56:22] we find that [05:56:24] there's essentially virtually no countries [05:56:26] that disbursed aid in such a way [05:56:28] that it pays for itself [05:56:32] we're also going to look at country pairs [05:56:34] and there isn't any sort of relationship [05:56:36] where countries give more aid [05:56:38] to recipients [05:56:40] with whom the market access [05:56:42] benefits [05:56:44] are particularly large [05:56:46] so we're going to kind of do a global search [05:56:48] with all the donors and all the recipients [05:56:50] and we're essentially going to find that it's almost never the case [05:56:52] that aid [05:56:54] pays for itself [05:56:57] then we're going to look at [05:56:59] the impact [05:57:01] of aid on geopolitical [05:57:03] alignment and we're also going to find [05:57:05] that there's not a ton [05:57:07] of [05:57:09] large changes in geopolitical alignment that [05:57:11] aid can engender based on our [05:57:13] estimates [05:57:15] so in a [05:57:17] sense it's a negative result [05:57:19] I was hoping for a number [05:57:21] 100% or greater but [05:57:23] we're nowhere near that so [05:57:25] it's not nothing [05:57:27] but in the end I don't think we have [05:57:29] a theory [05:57:31] or a quantification that says that [05:57:33] this particular geopolitical actions [05:57:35] aid is self-interested [05:57:37] in a way that we can measure [05:57:39] so the search continues [05:57:41] okay [05:57:43] let me skip this [05:57:45] alright so [05:57:47] we collected this data for aid [05:57:49] most of it is the standard source which is the OECD [05:57:51] supplemented with the data [05:57:53] for the Soviet Union [05:57:55] this is the [05:57:57] the aid [05:57:59] the absolute dollar aid disbursed by a [05:58:01] donor country on the [05:58:03] on the left [05:58:05] maybe it's a bit hard to see [05:58:07] but the US is by far the largest [05:58:09] disburser of aid [05:58:11] over this period [05:58:13] USSI is in the top 4 [05:58:15] but the other [05:58:17] countries in the top 5 are [05:58:19] somewhere around 1 third of the [05:58:21] US dollar volumes [05:58:23] over this period and then there's a [05:58:25] tale of countries that in dollar terms [05:58:27] don't distribute that much [05:58:29] if we did it as a share of [05:58:31] the donor GDP this [05:58:33] would look different then the [05:58:35] Nordic countries are going to have the [05:58:37] highest aid disbursements as a share of their GDP [05:58:39] but in terms of absolute [05:58:41] I think this is [05:58:43] in some sense more useful [05:58:45] on the [05:58:47] on the right [05:58:49] is the aid received [05:58:51] as a share of total global aid [05:58:53] here the big [05:58:55] players are India, Pakistan [05:58:57] Egypt, Turkey [05:58:59] these are kind of middle income [05:59:01] strategically important countries [05:59:03] as you might expect [05:59:05] again if we did it as a share of [05:59:07] recipient GDP this would look different [05:59:09] this would look more like the [05:59:11] poorest countries are receiving the highest amount of aid [05:59:13] as a fraction of their GDP [05:59:17] ok so the next thing we're going to do [05:59:19] is we're going to run a gravity [05:59:21] style regression [05:59:23] in which we [05:59:25] regress trade from [05:59:27] origin O [05:59:29] to destination D [05:59:31] so O is the country [05:59:33] disbursing aid, D is the country [05:59:35] that's receiving aid [05:59:37] on aid [05:59:39] between that [05:59:41] origin and that destination [05:59:43] with the usual fixed effects [05:59:45] so there's going to be something [05:59:47] slightly unusual here [05:59:49] which is that this is a gravity regression [05:59:51] estimated in levels [05:59:53] or in levels normalized [05:59:55] by the GDP of the [05:59:57] destination country, a lag GDP of [05:59:59] destination country [06:00:01] and there are two goals behind this [06:00:03] slightly less on its specification [06:00:07] the first and probably the [06:00:09] less important one is that aid [06:00:13] has a lot of zeros, actually has [06:00:15] way more zeros than trade [06:00:17] and so [06:00:19] you can do PPML [06:00:21] to [06:00:23] sort of take care of the zeroes problem [06:00:25] on the left hand side so we know how to do that [06:00:27] that's not the problem here [06:00:29] actually trade is not [06:00:31] that empty [06:00:33] but aid is empty and we don't have a natural way of [06:00:35] dealing with the zeros on the right [06:00:37] hand side [06:00:39] so [06:00:41] that's the same thing that we do in the [06:00:43] second one is that [06:00:45] we're going to show that the path [06:00:47] of the trade [06:00:49] increase following an impulse [06:00:51] in aid at some [06:00:53] year T [06:00:55] shows [06:00:57] continuing [06:00:59] changes in trade for up to five years [06:01:01] and so [06:01:03] when we estimate the total [06:01:05] market access benefit of an aid [06:01:07] dollar [06:01:09] we need to kind of like accumulate [06:01:11] the changes in trade over a period and [06:01:13] divided by the changes in aid over a period [06:01:15] so that puts us in [06:01:17] the fiscal multiplier literature [06:01:19] basically we're going to take this method [06:01:21] from Valid Rami [06:01:23] and that method cannot be done [06:01:25] in logs, right, because [06:01:27] you cannot add logs over time [06:01:29] so [06:01:31] you cannot add the log [06:01:33] fiscal stimulus from year to year but you can [06:01:35] add [06:01:37] the dollar [06:01:39] values [06:01:41] so that's what justifies that [06:01:43] having said that [06:01:45] in the paper we'll repeat the entire [06:01:47] analysis from beginning to end [06:01:49] with your typical log linear trade [06:01:51] specification that people [06:01:53] are much more used to [06:01:55] where we do aid [06:01:57] so mostly [06:01:59] we do inverse hyperbolic sign for aid [06:02:01] in that specification [06:02:03] everything basically goes through [06:02:05] and then we need to [06:02:09] instrument for aid [06:02:11] so here we're going to [06:02:13] rely on a Rujan Subramanian [06:02:15] style instrument [06:02:17] where [06:02:19] we [06:02:21] take total aid outflows from [06:02:23] some origin country O [06:02:25] obviously dropping the particular destination [06:02:27] country so leave one out [06:02:29] and we're going to cross it with [06:02:31] predicted share [06:02:33] of aid from country [06:02:35] O going to destination D [06:02:37] this lambda hat here [06:02:39] where lambda hat is going to come [06:02:41] from an auxiliary regression [06:02:43] where we regress aid flows [06:02:45] in the data [06:02:47] on [06:02:49] various predictors like bilateral [06:02:51] distance [06:02:53] you know colonial [06:02:55] ties, past [06:02:57] political alignment of [06:02:59] the government and so on [06:03:01] and generate an aid [06:03:03] prediction [06:03:05] that [06:03:07] then we turn into a share [06:03:09] this lambda OD [06:03:11] and so it's kind of an [06:03:13] interaction [06:03:15] so it's a kind of a shift share except there's no summation [06:03:17] right so [06:03:19] where [06:03:21] the shift is the total aid [06:03:23] coming out of country O [06:03:25] and the share [06:03:27] is the [06:03:29] predicted share of that total aid [06:03:31] and so we're going to go to country [06:03:33] country D [06:03:35] but because our [06:03:37] sample is bilateral so [06:03:39] it's at the OD level [06:03:41] there's no need to sum over [06:03:43] sum over the O's [06:03:47] okay so [06:03:49] these three regression tables [06:03:51] first is [06:03:53] does aid increase [06:03:55] trade [06:03:57] and the answer is yes so [06:03:59] the key coefficient is this 0.46 [06:04:01] additional dollar of aid [06:04:03] increases trade contemporaneously by [06:04:05] 45 cents [06:04:07] and by a dollar [06:04:09] 37, 5 years later [06:04:11] so there is definitely an impact [06:04:13] of one on the other [06:04:15] aid also [06:04:19] seems to increase geopolitical alignment so this is [06:04:21] going to be a regression that [06:04:23] is going to overlap with what we saw [06:04:25] earlier [06:04:27] except here we're doing it at [06:04:29] the bilateral level so this is the geopolitical [06:04:31] alignment between O and D [06:04:33] since we have 26 donor [06:04:35] countries we can do that [06:04:37] here in this exercise [06:04:39] so aid does seem to [06:04:41] increase geopolitical alignment [06:04:43] that's result number 2 [06:04:47] and then result number 3 [06:04:49] is that aid decreases the [06:04:51] market access [06:04:53] off the other block [06:04:55] so here the regressor is [06:04:57] the trade flow [06:04:59] from [06:05:01] the other block [06:05:03] to destination D [06:05:05] so if US gives aid [06:05:07] to Egypt [06:05:09] then [06:05:11] aid from the US to Egypt is over here [06:05:13] and the left hand side is exports [06:05:15] from the Soviet Union to Egypt [06:05:17] or from indeed the few [06:05:19] Soviet block countries we have in the data set to Egypt [06:05:23] and we see that [06:05:25] on impact there's nothing but 5 years later [06:05:27] that trade goes down by [06:05:29] about $2 [06:05:31] so this is over and above the usual multi-latter resistance terms [06:05:33] some of that is going to happen naturally [06:05:35] with [06:05:37] changes in the market [06:05:39] of the destination country [06:05:41] but that's not what that is [06:05:43] that's already controlled for so it's over on top [06:05:45] this is the bilateral dimension [06:05:47] of the trade with the other block [06:05:55] alright so [06:05:57] as I said the necessary condition for aid [06:05:59] to improve market access [06:06:01] and deliver potential benefits to the [06:06:03] donor is satisfied [06:06:05] aid does seem to increase [06:06:07] donors market access [06:06:09] to the recipient [06:06:11] but then [06:06:13] we cannot go further with the empirics [06:06:15] because [06:06:17] the empirics don't tell you what are the benefits to the [06:06:19] donor of this increased [06:06:21] market access and how do they compare with the cost [06:06:23] so here we're going to set up a plane vanilla [06:06:25] trade model [06:06:27] in which there's going to be [06:06:29] a bunch of countries so [06:06:31] okay so it would be like 130 countries [06:06:33] there's going to be a few sectors [06:06:35] so for us it's going to be four sectors [06:06:37] pretty aggregated because [06:06:39] we're talking about [06:06:41] the 100 poorest countries in the world [06:06:43] in the 70s there's not a ton of [06:06:45] detailed sectoral data for those [06:06:47] countries so [06:06:49] we're going to have four sectors [06:06:51] agriculture, commodities, manufacturing [06:06:53] and non-tradables [06:06:57] and the household [06:06:59] is going to [06:07:01] minimize this [06:07:03] garbage aggregate of all the possible [06:07:05] consumption sectors [06:07:07] J and the budget constraint [06:07:09] is going to have aid in it [06:07:11] right so [06:07:13] the household is going to consume [06:07:15] so this is the consumption spending [06:07:17] is going to consume out of the labor income [06:07:19] labor is the only factor of production [06:07:21] and then it's going to consume [06:07:23] this aid that it [06:07:25] received from all the possible origin countries [06:07:27] all [06:07:29] the aid is essentially a transfer [06:07:31] from [06:07:33] the recipient [06:07:35] from the donor to the recipient [06:07:37] and the recipient gets to eat it [06:07:41] and then if you're [06:07:43] a donor [06:07:45] so if you're a poor country you get this [06:07:47] plus A-D-D [06:07:49] summed across all the origins [06:07:51] if you're the donor [06:07:53] then basically [06:07:55] you [06:07:57] subject to the [06:07:59] lump sum tax [06:08:01] TD that then pays for [06:08:03] your aid flows out into the world [06:08:05] right so if you're a donor country [06:08:07] you're directly reducing your consumption [06:08:09] here by this amount [06:08:11] which is the total aid that D disverses [06:08:13] to the rest of the world [06:08:15] and then there's an exogenous trade [06:08:17] deficit to match the data [06:08:21] and then we have [06:08:23] the standard input output structure that we also saw [06:08:25] a bunch of times this morning [06:08:27] so [06:08:29] trade [06:08:31] sorry the aggregate [06:08:33] of the sector J [06:08:35] in country F [06:08:37] in country D sorry is [06:08:39] Armington in the imports [06:08:41] from all the other countries with the [06:08:43] Armingtonal SysCity Epsilon [06:08:45] and then [06:08:47] these varieties [06:08:49] are produced with the [06:08:51] Cabdagos production function that takes [06:08:53] labor and then inputs from all [06:08:55] the other sectors [06:08:57] in the economy [06:08:59] so completely vanilla model [06:09:03] just we have this aid [06:09:05] in flows and out flows [06:09:11] and then there's one more [06:09:13] really one crucial parameter that we need to calibrate [06:09:15] which is the elasticity with which [06:09:17] aid [06:09:19] decreases trade costs [06:09:21] so we're going to say that [06:09:23] there's this IZ-WARP trade cost [06:09:25] tau ODF to go from [06:09:27] origin to destination [06:09:29] that are made up of some exogenous [06:09:31] component and then the aid [06:09:33] flows from O2D [06:09:35] and to the power of some [06:09:37] elasticity [06:09:39] or here [06:09:41] you know [06:09:43] if we had a log linear [06:09:45] a gravity regression [06:09:47] that we've all seen hundreds of times [06:09:49] we would basically take the coefficient on aid [06:09:51] from the gravity [06:09:53] regression and divide by the trade [06:09:55] ratio between this pair of countries [06:09:57] to turn this into [06:09:59] an elasticity [06:10:01] which would make the trade benefit [06:10:03] of aid [06:10:05] heterogeneous [06:10:07] and then we have [06:10:09] the cost of aid [06:10:11] and then we have [06:10:13] the cost of aid [06:10:15] and then we have [06:10:17] the cost of aid [06:10:19] and then we have [06:10:21] the cost of aid [06:10:23] heterogeneous across country pairs [06:10:25] in this particular way [06:10:27] which is that if you give [06:10:29] a lot of aid and you don't trade that much [06:10:31] pre-shock [06:10:33] the model is going to say that the [06:10:35] elasticity is high [06:10:37] so a dollar of aid [06:10:39] is delivering [06:10:41] you a huge trade benefit [06:10:43] because you're starting from a low base of trade [06:10:45] and vice versa [06:10:47] so again we can think of this as a feature or a bug [06:10:49] I'm not really sure [06:10:51] but [06:10:53] there is some heterogeneity that gets induced there [06:10:55] just [06:10:57] as a benchmark though [06:10:59] this coyote for the US is something like [06:11:01] 0.3 at the mean [06:11:03] for the USSR [06:11:05] which doesn't trade that much [06:11:09] with the rest of the world [06:11:11] it's like 0.6 [06:11:13] and then [06:11:15] we're going to show you some results where we're going to also have a [06:11:17] trade diversion term [06:11:19] where essentially when [06:11:21] you give aid [06:11:23] when O gives aid to D [06:11:25] then D [06:11:27] increases its trade costs with the opposing [06:11:29] block [06:11:31] and that's going to be this term [06:11:33] and this V [06:11:35] is also going to come out from the [06:11:37] from the regressifications that we're on [06:11:39] ok so here are the main results [06:11:44] we're going to [06:11:46] take [06:11:48] the US in the 1970s [06:11:50] and we're going to reduce [06:11:52] its aid budget by [06:11:54] 86% so that's the current US aid cut [06:11:56] we can do it by [06:11:58] nothing really changes [06:12:00] what happens [06:12:02] what happens in the baseline is that the US's [06:12:04] welfare [06:12:06] goes up by 0.15% [06:12:08] this is roughly commensurate with [06:12:10] just the cost of aid [06:12:12] that [06:12:14] kind of the direct cost of aid [06:12:16] in this case [06:12:18] however if the [06:12:20] US did not receive the [06:12:22] market access benefit [06:12:24] of the [06:12:26] lower trade costs to these countries [06:12:28] the US welfare would go up by 0.21% [06:12:30] to 0.205 [06:12:32] and the difference between these two numbers [06:12:34] is essentially the extent to which [06:12:36] market access benefits [06:12:38] offset this direct fiscal cost of aid [06:12:40] so that's [06:12:42] something like 27% [06:12:44] it's the comparing 0.15 [06:12:46] to 0.205 [06:12:52] in [06:12:54] case where we do trade [06:12:56] diversion so the [06:12:58] Soviet Union's aid [06:13:00] sorry the Soviet Union trade falls [06:13:02] when the US [06:13:04] increases aid [06:13:06] actually the welfare changes for the US don't really budge [06:13:08] that much there's not enough interdependence [06:13:10] on the trade network to really [06:13:12] have a big impact [06:13:14] and perhaps what's [06:13:16] a bit less [06:13:18] surprising is that it doesn't really [06:13:20] change the fortunes for the Soviet Union that much [06:13:22] so that's the last column there [06:13:24] it's essentially two decimal points behind the impact [06:13:26] on the US itself [06:13:28] so [06:13:30] even with the trade diversion effect [06:13:32] putting out aid [06:13:34] does not really allow the US [06:13:36] to hurt the Soviet Union that much [06:13:45] I guess one more thing I should say [06:13:47] is that actually [06:13:49] the change in trade [06:13:51] is quite massive here [06:13:53] so the US trade share [06:13:55] to the recipient countries falls by [06:13:57] something like 37% [06:13:59] so what is this [06:14:01] it's not that [06:14:03] aid does not change [06:14:05] the trade share that much [06:14:07] it changes the trade share a lot [06:14:09] it's that [06:14:11] most of the time these are small countries [06:14:13] that are not important for the US market access [06:14:15] and so [06:14:18] the [06:14:20] the welfare benefits are small because of that [06:14:22] the market access benefits are small because of that [06:14:24] ok [06:14:26] so I'll skip the Soviet Union [06:14:28] since I'm almost out of time [06:14:30] ok so now let's do all the countries [06:14:32] right [06:14:34] so we can do donor by donor [06:14:36] and see how much [06:14:38] does welfare change [06:14:40] when this donor reduces aid [06:14:42] by 86% [06:14:44] those are the white dots [06:14:46] so in every case the donor welfare goes up [06:14:48] meaning that the market access benefits do not [06:14:50] compensate fully [06:14:52] for the cost of aid [06:14:54] except for [06:14:56] Spain, Portugal and South Korea [06:14:58] these are countries [06:15:00] where aid essentially pays for itself [06:15:02] but these are also the least important donors [06:15:04] in some sense [06:15:06] relative to their own GDP [06:15:08] they're not big donors [06:15:10] so that's at the donor level [06:15:12] then we can go down to the country pair level [06:15:14] so donor recipient level and ask [06:15:16] you know what is the fraction [06:15:18] of either $8 [06:15:20] or aid relationships at country pairs [06:15:22] for which [06:15:24] aid pays for itself [06:15:26] that's the right [06:15:28] graph so the blue bar is the share of [06:15:30] $8 [06:15:32] where aid pays for itself worldwide [06:15:34] in this old donors column [06:15:36] and it's basically 1% [06:15:38] so 1% of world [06:15:40] aid pays for itself [06:15:42] and only something like [06:15:44] 10% of donor recipient pairs [06:15:46] aid pays for itself [06:15:48] right again there's some heterogeneity [06:15:50] so Portugal manages to have [06:15:52] 50% of its aid dollars [06:15:54] or recipients pay for itself [06:15:56] but for the most part these are tiny [06:15:58] tiny numbers [06:16:00] so in that sense it's a negative result [06:16:04] okay let me skip this [06:16:06] let me say a word about the recipients [06:16:08] so this paper is not recipient focused [06:16:10] but here's something on the recipients [06:16:12] just two graphs [06:16:14] the first one is [06:16:16] an attempt to break it down [06:16:18] into spheres of influence [06:16:20] so [06:16:22] the [06:16:24] what we're plotting here is the change in [06:16:26] real income of the recipient [06:16:28] following a US [06:16:30] removal trade on the x-axis [06:16:32] and USSR removal of aid [06:16:34] sorry not trade on the y-axis [06:16:36] what you see here is that countries that are above [06:16:38] the 45 degree line [06:16:40] are ones in the US camp [06:16:42] meaning that [06:16:44] the US aid for those countries [06:16:46] has much more impact than the Soviet aid [06:16:48] right so [06:16:50] so these are countries [06:16:52] over here and then below the 45 degree line [06:16:54] are countries where the Soviet aid [06:16:56] makes a much bigger welfare impact [06:16:58] and you see that [06:17:00] the spheres of influence are dominated [06:17:02] by [06:17:04] the US so out of [06:17:06] out of these [06:17:08] 100 or so recipients [06:17:10] something like 63 [06:17:12] on average over this period are in the US [06:17:14] camp and 6 [06:17:16] in the Soviet camp [06:17:18] there's not that many countries [06:17:20] where the Soviet Union really [06:17:22] dominates [06:17:24] and then [06:17:26] this is [06:17:28] the cost of aid to the donor [06:17:30] this is the US [06:17:32] on the left and the Soviet Union on the right [06:17:34] fluttered against [06:17:36] the geopolitical distance [06:17:38] so [06:17:40] this is the cost of aid inclusive of market access [06:17:42] not just the fiscal cost [06:17:44] and what you see is that [06:17:46] the costliest aid [06:17:48] is actually [06:17:50] with the exception of Israel for the US [06:17:52] the costliest aid is actually for countries that are [06:17:56] that have like a mid level of alignment [06:17:58] with [06:18:00] the US or the Soviet Union so these are countries like [06:18:02] India, Turkey [06:18:04] would be emblematic here [06:18:06] so it's just [06:18:08] another kind of data point to say [06:18:10] aid is mostly not about market access [06:18:14] these countries that are very expensive [06:18:16] are countries that are [06:18:18] not particularly aligned [06:18:20] with the US geopolitically [06:18:22] okay and finally [06:18:24] this is going to be very similar to [06:18:26] the exercise that was done [06:18:28] earlier today [06:18:30] we're looking at the geopolitical alignment [06:18:32] change when we cancel aid [06:18:34] and what we're plotting here [06:18:37] is the observed geopolitical alignment [06:18:39] on the x-axis [06:18:41] and the geopolitical alignment [06:18:43] in the left graph where you completely [06:18:45] cancel US aid [06:18:49] and the countries that are on the left [06:18:51] in red are countries in the [06:18:53] Soviet camp in the blue [06:18:55] on the right are countries in the US [06:18:57] camp [06:18:59] and what we're hoping for [06:19:01] is something in this quadrant [06:19:03] if a country was in this quadrant [06:19:05] it would mean that US aid had moved it [06:19:07] from the US camp [06:19:09] sorry from the Soviet camp to the US camp [06:19:11] right and we find nothing [06:19:13] there essentially [06:19:15] but no aid and aid [06:19:17] geopolitical alignment [06:19:19] are on the 45 degree line [06:19:21] is the same in the Soviet Union [06:19:23] okay [06:19:25] so I think [06:19:27] I will stop here [06:19:29] hopefully it was pretty clear [06:19:31] the discussion is Jesus ## Discussion (06:19:37 – 06:34:34) [06:19:38] Fernandez Villaderde [06:19:46] okay thanks for inviting me [06:19:48] to discuss this paper [06:19:50] so what I want to do first [06:19:52] is to quickly review the main [06:19:54] results since the paper has many of them [06:19:56] the first set of results [06:19:58] is purely empirical [06:20:00] and I will say there are four [06:20:02] things that you want to take away [06:20:04] first that aid buys [06:20:06] new market access [06:20:08] the authors implement what I think [06:20:10] is a plausible exogenous race [06:20:12] in bilateral aid disembarkments [06:20:14] and that significantly [06:20:16] raises the donors [06:20:18] exports to the recipient [06:20:20] the second one is that the effect [06:20:22] grows over time is [06:20:24] $0.46 for every [06:20:26] dollar that you spend on impact [06:20:28] grows all the way to 1.37 [06:20:30] 5 years out [06:20:32] that aid seems to buy you friends [06:20:34] but not really best friends [06:20:36] in the sense that they will vote for you [06:20:38] a little bit closer in the United Nations [06:20:40] and that it seems that if you give [06:20:42] to someone then they will get [06:20:44] a little bit less [06:20:46] from the other side of the Cold War [06:20:48] the second [06:20:50] set of results are quantitative [06:20:52] the paper builds a full model [06:20:54] is a [06:20:56] you know kind of a state of the art [06:20:58] the country trade model [06:21:00] calibrated to the Cold War [06:21:02] and 26 donors including the [06:21:04] Soviet Union and China and 101 recipients [06:21:06] and then they add the [06:21:08] a channel [06:21:10] measure as aid flows [06:21:12] plus the market access benefit [06:21:14] estimated from the [06:21:16] previous [06:21:18] regressions [06:21:20] and the main thing is that market [06:21:22] access matters but it doesn't pay [06:21:24] for itself [06:21:26] because you always hear this idea [06:21:28] that hey, you know, we are going to give aid [06:21:30] and we are going to recover it through the [06:21:32] backdoor while there is something to the [06:21:34] argument but it's not all [06:21:36] the argument. The same thing [06:21:38] happens for the Soviet Union [06:21:40] and as Andrej was [06:21:42] mentioning at the beginning you have this [06:21:44] interesting cases of Spain, Portugal and South [06:21:46] Korea that I will come back to them [06:21:48] a little bit later because even [06:21:50] if you were trying to say that they are not that big [06:21:52] I actually think there is something interesting about the three of them [06:21:54] and finally [06:21:56] the paper also has a component [06:21:58] about geopolitical alignment [06:22:00] which is that doesn't seem to be the case that [06:22:02] there is a lot of relation or link between [06:22:04] cause and alignment [06:22:06] and that who you really [06:22:08] want to give money to is people who are in the middle [06:22:10] that kind of makes sense, you know, it's like [06:22:12] when you are doing campaigns, I'm Republican [06:22:14] I'm not going to campaign in Utah, they are going to vote for me anyway [06:22:16] I'm not going to campaign in San Francisco [06:22:18] if I'm Democrat they are going to vote for me anyway [06:22:20] I go to Pennsylvania where [06:22:22] all my neighbors are not quite sure who to vote for [06:22:24] and that was the case of India [06:22:26] you know, in the one hand [06:22:28] India was a democracy and it was [06:22:30] basically a market economy [06:22:32] and they were more or less aligned with the West [06:22:34] but on the other hand it got a lot of Soviet hardware [06:22:36] if you actually take a look at the Indian Air Force [06:22:38] you will realize they fly mix [06:22:40] and this was important [06:22:42] the Indians were able to get money from the Soviets [06:22:44] and the Americans but no one really switched caps [06:22:46] okay, this is like a friend with benefits [06:22:48] at the end of the day you don't really cross [06:22:50] the line into something different [06:22:52] so once I have summarized [06:22:54] a little bit the [06:22:56] the results let me give you an assessment [06:22:58] of the paper and I really like it a lot [06:23:00] it was a really nice paper [06:23:02] I enjoyed tremendously [06:23:04] because of several reasons [06:23:06] first of all because of data collection [06:23:08] there was another paper this morning [06:23:10] doing a similar data collection but that doesn't take [06:23:12] anything out of the [06:23:14] a value of going there and figuring it out [06:23:16] how much money the Soviets and the Chinese [06:23:18] were giving to people around [06:23:20] the interpretation is very clear and intuitive [06:23:22] it's not one of those papers that you read [06:23:24] and you go over you know page 7, 7 times [06:23:26] because you don't quite get what is going on [06:23:28] it's very clear, it's very well written [06:23:30] and that's something that I always tell [06:23:32] all my graduate students you should always do [06:23:34] which is have a good empirical section [06:23:36] and a good quantitative model and both of them [06:23:38] speak into each other [06:23:40] and it puts hard numbers in a literature [06:23:42] that often has been too narrative [06:23:44] I don't have a lot of time, only 15 minutes [06:23:46] but if you go to political science [06:23:48] and international relations there are [06:23:50] tons of monographs about 8 [06:23:52] and what 8 does to you [06:23:54] and what you can buy with 8 [06:23:56] what you cannot buy with 8 [06:23:58] and you read the books and you're like [06:24:00] okay whatever this guy has written 300 pages [06:24:02] but at the end of the day so what [06:24:04] and this is good [06:24:06] this is changing the literature to a completely [06:24:08] different level where instead [06:24:10] of having 300 pages what you do [06:24:12] is you have hard numbers [06:24:14] and you have a very nice [06:24:16] my comments are not really [06:24:18] criticisms of the paper but [06:24:20] extensions and I think that the paper [06:24:22] really opens the door to a lot of stuff [06:24:24] that can be done very nicely [06:24:26] so my 4 comments [06:24:28] are going to be about data [06:24:30] what counts as a dollar of 8 [06:24:32] the second one will be at the point [06:24:34] estimates both in terms of indirect [06:24:36] and strategic effects [06:24:38] then I think I would like to [06:24:40] understand a little bit better the mechanisms [06:24:42] of the data lines in terms of [06:24:44] why does a dollar of 8 come back [06:24:46] the effects, static versus dynamic [06:24:48] effects and finally as I was [06:24:50] mentioning before I'm going to have a [06:24:52] Coda with Spain, Portugal and South [06:24:54] Korea so let me start with the [06:24:56] data so I was trying to [06:24:58] read in the appendix I wasn't [06:25:00] 100% sure about [06:25:02] these things so please correct [06:25:04] me if I'm wrong but I know [06:25:06] a little bit about military hardware [06:25:08] and I know that the problem [06:25:10] in other words is that the price that you put to it [06:25:12] is a price [06:25:14] a cost but [06:25:16] that doesn't really [06:25:18] tell you much [06:25:20] so this is a photograph of [06:25:22] Daedalus this was the aircraft carrier [06:25:24] that the Spanish Navy, the Spanish fleet [06:25:26] operated for around 25 years [06:25:28] this was 8 by the Americans [06:25:30] and this was [06:25:32] a pretty old auxiliary [06:25:34] carrier that the US Navy was [06:25:36] about to disregard they give it to Spain [06:25:38] you can see that the landing [06:25:40] is actually pretty small you can [06:25:42] only operate very small planes [06:25:44] these are carriers and [06:25:46] how does this show up in the USA [06:25:48] does it show up at the price it was [06:25:50] accounted for when it was built during World War II [06:25:52] does it show up at this real value in [06:25:54] 1963 in 1963 this [06:25:56] pretty much had only a scrap value [06:25:58] for the US Navy [06:26:00] the second thing that is very [06:26:02] important is that the 8 [06:26:04] many times will need to [06:26:06] be computed by [06:26:08] hedonic prices let me give you a very simple [06:26:10] example [06:26:12] the US goes and exports F-15s [06:26:14] to Saudi Arabia and you look at [06:26:16] the photographs and they will look like the F-15s [06:26:18] that the US Air Force is operating [06:26:20] no they are very different [06:26:22] planes so they are really really [06:26:24] sophisticated the stuff is not [06:26:26] on the version of the F-15 [06:26:28] that you are exporting to the Saudis [06:26:30] because you don't trust them so the [06:26:32] export versions of everything [06:26:34] all military weapons are actually very [06:26:36] different than what you are actually doing [06:26:38] and in addition to it [06:26:40] often you sell below [06:26:42] you don't really give grants but you have below market [06:26:44] loans and how do you actually account for [06:26:46] that access to credit for instance [06:26:48] imagine the only thing I'm doing is [06:26:50] giving you some lines of credit [06:26:52] this is particularly important in Comicon [06:26:54] what do prices mean [06:26:56] in a socialist economy you told me once [06:26:58] that your mom used to work for a ghost plan [06:27:00] so what does it mean [06:27:02] a price in a socialist economist [06:27:04] so imagine that you are the Soviet Union [06:27:06] and you want to keep the Cubans happy [06:27:08] because they are paying the battle [06:27:10] of people in Miami like [06:27:12] down there [06:27:14] and what you have over there is that [06:27:16] the Soviet Union bought Cuba [06:27:18] Cuban sugar well above the [06:27:20] market price and sold them [06:27:22] oil well below the market price [06:27:24] and that was the real transfer [06:27:26] does that show up in the data or not [06:27:28] and that means that maybe the [06:27:30] military is going to be a little bit too big [06:27:32] maybe not but you know it will be [06:27:34] interesting to understand this a little bit better [06:27:36] now [06:27:38] there are indirect effects and this is the [06:27:40] purchases from France so let's think [06:27:42] about one of the big recipients of [06:27:44] aid in your in your data set are the [06:27:46] is Egypt first from the Soviet Union and later [06:27:48] from the United States so Egypt [06:27:50] during the 1960s [06:27:52] got tons of military aid [06:27:54] from the Soviet Union this is a [06:27:56] D54-55 is kind of [06:27:58] difficult to tell from this photograph this was [06:28:00] destroyed in 73 in the [06:28:02] battle of the Chinese farm [06:28:04] and this were sold at a [06:28:06] below price by [06:28:08] the Soviet bloc but they were not [06:28:10] manufacturing the Soviet Union [06:28:12] they were manufacturing Czechoslovakia and Poland [06:28:14] so yes they were [06:28:16] paid by the Soviets but they were accounted in a very [06:28:18] different way and this happens [06:28:20] all the time the US gives aid to [06:28:22] someone and maybe it's not that [06:28:24] this someone is buying from the US is going to buy [06:28:26] from Germany or from France or from the United Kingdom [06:28:28] also I think it will be [06:28:30] interesting to think about aid as a [06:28:32] best response not as a return [06:28:34] and over here I think [06:28:36] there is a fantastic paper [06:28:38] and you know the best thing you can do in a [06:28:40] in a discussion is to praise the [06:28:42] organizers of the session [06:28:44] by Clayton and [06:28:46] and Jesse and [06:28:48] and Matteo [06:28:50] sorry I'm blinking now and [06:28:52] basically what they try to think is about this [06:28:54] strategic interaction between two [06:28:56] eggemons and my favorite example is [06:28:58] Vietnam so during the [06:29:00] last kind of six seven years of the [06:29:02] Vietnam war what North Vietnam will do [06:29:04] will be the following they will go to [06:29:06] Moscow and say oh the Chinese are giving us [06:29:08] more money because they are the true revolutionaries [06:29:10] and then Moscow will say no no no they call this money [06:29:12] because we are more revolutionaries than the [06:29:14] Chinese and then the Vietnamese will go to [06:29:16] Beijing and will say you know the Soviets are giving us [06:29:18] all this money because they are more revolutionary than you [06:29:20] and the Chinese will be like no no you need to [06:29:22] think a little bit about that, it's an extension [06:29:24] you know it's not something that you would [06:29:26] probably need to do in this paper but this will be [06:29:28] really nice [06:29:30] now I was thinking a little bit [06:29:32] about the mechanisms [06:29:34] why is the case that 8 really makes such [06:29:36] a difference and I think that one [06:29:38] possibility worth exploring in a follow-up [06:29:40] paper is the technological [06:29:42] lockings and it's the [06:29:44] fact that 8 often arrives as [06:29:46] equipment or as technical assistance [06:29:48] and that locks you in [06:29:50] into future sales like spare parts [06:29:52] upgrades, maintenance [06:29:54] and this is particularly important [06:29:56] in modern weapons systems because [06:29:58] actually running a modern weapons system [06:30:00] is way more expensive in terms of maintenance [06:30:02] at the sticker price [06:30:04] coming back to the example I was telling [06:30:06] you before I was explaining [06:30:08] that the Soviets gave all this [06:30:10] T-54s and 55s to the [06:30:12] Egyptians but Sadat [06:30:14] expels the Soviet advisors in 1972 [06:30:16] so then basically the Egyptians have a [06:30:18] problem that these tanks are not really [06:30:20] very useful anymore [06:30:22] and the equipment on US systems [06:30:24] has actually cost billions of dollars [06:30:26] to Egypt and it's still not [06:30:28] complete as of 2026 [06:30:30] this is a modernized version [06:30:32] of the T-55 this is called Ramses 2 [06:30:34] and you can see over here [06:30:36] how it's landing actually from a US [06:30:38] ship and this is a joint [06:30:40] exercise between Egypt and the US Armed Forces [06:30:42] and this was modernized [06:30:44] with US technology but this is very difficult [06:30:46] it's like taking an old house [06:30:48] and putting a new AC [06:30:50] is actually quite different [06:30:52] but that goes beyond weapons systems [06:30:54] think about for instance the fact that [06:30:56] much of modern technology has many [06:30:58] quality features and my favorite example [06:31:00] is Calibers [06:31:02] so over there you have two types of bullets [06:31:04] these ones are [06:31:06] both of them are 7.62 [06:31:08] which was the standard [06:31:10] caliber for [06:31:12] an assault weapon during the 1960s [06:31:14] and 1970s but this is the NATO standard [06:31:16] which is 51 milliliters [06:31:18] this is the one that I used [06:31:20] and this is the Warsaw Pact standard [06:31:22] this is 39. The problem is [06:31:24] if you get here from the Soviets [06:31:26] you get a stock in using this today [06:31:28] and even today it gives you use this type of company [06:31:30] so this is the type of things [06:31:32] that I think are very important to understand [06:31:34] and I have many other examples [06:31:36] in Ravel Gage [06:31:38] that you get with the Chinese [06:31:40] they convince you to use one particular [06:31:42] type of Ravel Gage or the Soviets back in the day [06:31:44] and that's going to buy you into buying Chinese [06:31:46] stuff in the long run [06:31:48] electric power are you going to use [06:31:50] 60 hertz as the US [06:31:52] or 50 as Europe and the Soviet Union [06:31:54] nuclear reactors [06:31:56] even today Rosatom tries to sell you [06:31:58] reactors at a very very cheap price [06:32:00] because what they really want to do is make money [06:32:02] out of the fuel. Think about Hewlett Packard [06:32:04] Hewlett Packard sells you very cheap printers [06:32:06] because you are going to buy Hewlett Packard [06:32:08] and Icaridges [06:32:10] the same thing you could think today about telecoms [06:32:12] like Hubev, 5G, etc. [06:32:16] another interesting mechanism [06:32:18] that will be interesting [06:32:20] to explore is changes in taste [06:32:22] and over here I want to point out [06:32:24] the PL 480 foot 8 [06:32:26] which was basically how the US [06:32:28] sent a lot of food [06:32:30] to other countries during the 1950s [06:32:32] this is a bunch of grain arriving to India [06:32:34] and what I think is very interesting [06:32:36] over there is that [06:32:38] by giving food aid [06:32:40] you are also changing tastes of people [06:32:42] and this is an actual photograph [06:32:44] of cheetar cheese [06:32:46] that was donated by the [06:32:48] United States of America to [06:32:50] Spanish schools and [06:32:52] Maidat always remembers [06:32:54] and he has told me many times how for [06:32:56] dessert at lunchtime [06:32:58] in the cafeteria [06:33:00] in his small school in a village [06:33:02] in the middle of nowhere in the north of Spain [06:33:04] in the 1950s they will have these big fields [06:33:06] and they will give him cheetar cheese [06:33:08] although to be honest [06:33:10] that's the reason why he claims he cannot stand cheetar cheese [06:33:14] anyway [06:33:16] but the point is there is quite a lot of evidence [06:33:18] for instance that [06:33:20] because of the grain shipped by the US [06:33:22] to Japan and South Korea [06:33:24] bread became more popular in these two countries [06:33:26] and they still buy a lot of wheat [06:33:28] from the United States so this will be very interesting [06:33:30] to explore [06:33:32] the model is static [06:33:34] the empirical results are dynamic [06:33:36] and fully aware that computing dynamic models [06:33:38] is very complicated but it will be interesting [06:33:40] to talk a little bit more about the relations [06:33:42] between the short run impact, the long run impact [06:33:44] etc [06:33:46] I already mentioned in the Anturk and I only have [06:33:48] 59 seconds left [06:33:50] so let me use the last few seconds [06:33:52] to talk about Spain, Portugal and South Korea [06:33:54] yes there were a small [06:33:56] recipients of aid [06:33:58] but the three countries were characterized by [06:34:00] being miracle countries [06:34:02] and they were very very fast [06:34:04] so maybe what is really driving is not as much [06:34:06] the size of the aid [06:34:08] that the fact that these countries were really [06:34:10] growing a lot [06:34:12] and I think there is a very interesting research avenue [06:34:14] which is the interact of aid effect [06:34:16] with recipient growth [06:34:18] it is aid a bet on takeoff [06:34:20] it is about picking winners [06:34:22] it is donors, it is luck etc [06:34:24] but let me conclude this is really really a very nice paper [06:34:26] it opens the door to much follow up work [06:34:28] which is absolutely the best you can say about something [06:34:30] so please go ahead and read it [06:34:32] because you are going to enjoy it a lot [06:34:34] thank you ## Q&A (06:34:34 – 06:47:39) [06:34:39] so let's collect a few questions [06:34:41] Chenzi [06:34:50] that was really interesting [06:34:52] I had a question about how [06:34:54] you tie aid to then ultimately [06:34:56] the conclusions about welfare [06:34:58] and whether it pays for itself [06:35:00] and it seems like in your model [06:35:02] it all lands on the iceberg trade cost [06:35:04] which [06:35:06] and I was wondering if you could talk a little bit more [06:35:08] about what it would look like [06:35:10] if instead you thought about it as like a preference [06:35:12] shifter or something [06:35:14] where it looks a little bit more like tie aid [06:35:16] it just feels [06:35:18] straight [06:35:20] I just find it interesting that [06:35:22] an iceberg trade cost is like really a [06:35:24] technological change [06:35:26] fewer resources are depleted [06:35:28] which feels very different from [06:35:30] you give aid to a country [06:35:32] the country likes you more and they will just want to buy [06:35:34] more of your stuff [06:35:36] Lena? [06:35:46] and the four of us were in the meeting [06:35:48] so in some of those papers [06:35:50] A.A. has affected by alliances [06:35:52] and the trade has also affected by alliances [06:35:54] and so it might be [06:35:56] a case that if A.A. and the trade are related [06:35:58] it could be [06:36:00] a result of their foreign policy preferences [06:36:02] and not actually a driver of foreign policy [06:36:04] preferences so maybe one thing to think about [06:36:06] a second one is about [06:36:08] this kind of domestic political economy [06:36:10] in the donor countries [06:36:12] that who benefits from market access [06:36:14] versus who pays for the cost of aid [06:36:16] or different constituencies [06:36:18] I want to start to open that up [06:36:20] there might be different political costs [06:36:22] associated with it and I had the same question [06:36:24] about whether or not [06:36:26] some of the market access effect that you're seeing [06:36:28] is actually just a result of tie aid [06:36:30] like US and PL480 [06:36:32] requiring you to buy US manufacture [06:36:34] or US grown food [06:36:36] Matilda? [06:36:38] I think it's a fast question [06:36:40] about political science [06:36:42] John [06:36:44] Following up on this [06:36:49] one can be important for welfare [06:37:01] subsidizing trade with recipients [06:37:03] and in fact the donor is welfare for the opposite [06:37:05] so if you have anything in the data [06:37:07] you can see about trade policy that would be super useful [06:37:09] and then why don't you take this initial set [06:37:11] and then we'll open it up for more [06:37:13] great [06:37:15] thank you very much Jesus [06:37:17] this was a great discussion [06:37:19] certainly all the points are fair [06:37:21] we need to show on them [06:37:23] I don't have anything to [06:37:25] object to or clarify [06:37:27] yeah so on the question of [06:37:29] what is it [06:37:31] we need to think about it more deeply [06:37:33] clearly so [06:37:35] there is this [06:37:37] for some purposes isomorphism [06:37:39] between iceberg share cost and preference shifts [06:37:41] in terms of how they're going to affect trade shares [06:37:43] it will matter [06:37:45] or like [06:37:47] relatedly [06:37:49] whether it's a tariff [06:37:51] or some iceberg share cost [06:37:53] is going to matter a lot for the recipient [06:37:55] welfare so we completely [06:37:57] acknowledge that [06:37:59] but from the perspective [06:38:01] of the donor I think what matters [06:38:03] is it shifting my demand curve [06:38:05] for my goods in this country or not [06:38:07] and for that I don't think it matters [06:38:09] that much whether it's [06:38:11] it's like a shipping cost [06:38:13] or a preference shift [06:38:15] or even a tariff going down [06:38:17] in the other country [06:38:19] so we don't emphasize the welfare results [06:38:21] for the recipient [06:38:23] but for the donor I think it should be quite similar [06:38:29] tide aid [06:38:31] I don't view this as a [06:38:33] problem for what we're trying to do [06:38:35] again what matters is [06:38:37] is this aid increasing demand [06:38:39] for the stuff that we produce [06:38:41] even if it's tide explicitly [06:38:43] I don't view that necessarily as a problem for me [06:38:45] it could be part of the story [06:38:47] domestic distribution [06:38:49] of effects completely [06:38:51] that's fascinating we're going to try to [06:38:53] think about that more [06:38:55] and what we can do in the data context [06:38:57] but yeah absolutely that's super interesting [06:38:59] and then [06:39:01] Alliance says [06:39:03] so this is [06:39:05] hopefully the job of the education strategy [06:39:07] we have this exogenous change in trade [06:39:09] or [06:39:11] we claim this is exogenous [06:39:13] some of this [06:39:15] might get absorbed by the fixed effects as well [06:39:17] so we have country pair fixed effects throughout [06:39:19] so if it's a country [06:39:21] that just fundamentally gets a lot of US trade [06:39:23] and aid [06:39:25] that's kind of constant over time [06:39:27] that's going to get absorbed [06:39:29] as well [06:39:31] yeah I think that's [06:39:33] all [06:39:35] Peter [06:39:37] just very quickly there's a good [06:39:39] extensive amount of trend from the built infrastructure [06:39:47] in generally back in general [06:39:53] and so [06:40:00] in those cases [06:40:02] the benefits of the trade [06:40:05] are actually as large or large [06:40:09] especially because these countries were resource scarce [06:40:14] and we're looking for places to [06:40:16] find natural resources [06:40:18] and then of course there's a wide variety [06:40:20] of work on all sorts of other reasons [06:40:22] you've heard a lot of them about why [06:40:24] countries give aid and it's not specifically [06:40:26] about the trade benefits [06:40:28] the most common answer [06:40:30] is to buy geopolitical support [06:40:32] you find some of that in your alliance results [06:40:34] but also [06:40:36] there's this whole notion of [06:40:38] what some political [06:40:40] scientists call soft power [06:40:42] you want to extend a good image [06:40:44] abroad you want the domestic politics [06:40:46] the publics in the recipient countries [06:40:48] to think nice things about you [06:40:50] and so that may have geopolitical [06:40:52] returns as well [06:40:54] but over different measures [06:40:56] somewhat related [06:40:58] maybe this is just a question of interpretation [06:41:00] but it seems like you're emphasizing [06:41:02] the aid for itself [06:41:04] and so the benchmark is 100% [06:41:06] I think for development economists [06:41:08] maybe the benchmark is zero [06:41:10] so knowledge is zero 27% [06:41:12] it's pretty good [06:41:16] trust me because aid doesn't [06:41:18] aid for itself along [06:41:20] the single market access [06:41:22] measure doesn't mean that [06:41:25] when we say it's good [06:41:27] we have a question for you [06:41:29] just as much as the other chefs [06:41:31] that cook the same ingredients [06:41:33] which is you could imagine [06:41:35] that these under [06:41:37] underreaction of the outcomes [06:41:39] could be several things [06:41:41] or you could be one that [06:41:43] it's really a very nonlinear model [06:41:45] and you're estimating a local linear effect [06:41:47] the counter-facial is not that I wouldn't move linearly [06:41:49] a little bit farther up [06:41:51] but I might have switched massively [06:41:53] alliance [06:41:55] the other one might be [06:41:57] there are just so many dimensions [06:41:59] in which this is paying off [06:42:01] that on each one of them [06:42:03] it looks MPV negative [06:42:05] but once you sum them all up [06:42:07] it's pretty worth it [06:42:09] or the last one might be [06:42:11] just simply that's why it's aid [06:42:13] it better be that it's MPV negative [06:42:15] otherwise we would have said [06:42:17] we're just buying something [06:42:19] when you step away from the narrow confines [06:42:21] of the paper [06:42:23] and you're being played with the data [06:42:25] where do you think this is going? [06:42:31] No, like all fair questions [06:42:35] so the last three questions [06:42:37] are kind of very similar [06:42:39] which is what are the other payoffs [06:42:41] and [06:42:43] is it altruism [06:42:45] is it [06:42:47] that we want to be liked [06:42:49] and so on so those are very similar [06:42:51] yeah sure, I think [06:42:53] one way to view the paper is [06:42:55] we're not going to be left out of it [06:42:57] and then there's still 70% left [06:42:59] and [06:43:01] if we're [06:43:03] allowed to reinsert it back into the preferences [06:43:05] then we can have a preference shift [06:43:07] that's going to explain everything [06:43:09] which is [06:43:11] it's not a bit the name of the game [06:43:13] of the way we're trying to play [06:43:15] but [06:43:17] there are some economic mechanisms [06:43:19] that perhaps [06:43:21] for which the data are collectible [06:43:23] there are some other mechanisms [06:43:25] for US multinationals for example [06:43:27] like service export [06:43:29] you can still try to mine it a bit more [06:43:31] to see if we're [06:43:33] not accounting for all the market access here [06:43:35] so that could be part of it [06:43:37] but of course [06:43:39] clearly on the table is also the possibility [06:43:41] that this isn't [06:43:43] optimizing behavior in any way [06:43:45] whoever said that governments are doing optimization [06:43:49] so [06:43:51] that's certainly [06:43:53] that's certainly [06:43:55] we have all kinds of narratives [06:43:57] about [06:43:59] going back to Eisenhower about military industrial complex [06:44:01] things being captured [06:44:03] by special interests and so on [06:44:05] that's another perhaps [06:44:07] thing to explore following up [06:44:09] on this question about distributional effects [06:44:13] and yeah, infrastructure [06:44:15] would fall very much [06:44:17] into this story [06:44:21] actually [06:44:23] if outside of the [06:44:25] the headroom ons the effects are stronger [06:44:27] not weaker [06:44:29] so if we were to apply these different coefficients [06:44:31] we'll actually get bigger payoffs [06:44:33] for non-hedgeroom money countries [06:44:35] so that perhaps fits in with [06:44:37] this [06:45:11] market access [06:45:13] and then the Trump administration [06:45:15] has been smart [06:45:17] let me play with [06:45:19] and Jim Smart have only the one that [06:45:21] has been [06:45:23] I mean that's what they said [06:45:25] that's what the quote said [06:45:27] right? [06:45:29] so if there was some kind of originating [06:45:31] you cut first the one that didn't buy you any market access [06:45:33] and then you leave only the one that does [06:45:35] give you market access [06:45:37] so there you may get different [06:45:39] no, yeah, so there is [06:45:41] heterogeneity across [06:45:43] all pairs [06:45:45] right? [06:45:47] so those are those bar charts that I was showing [06:45:49] but then you know I skipped some scatter plots [06:45:51] and you see there is actually [06:45:53] a ton of [06:45:55] variation in [06:45:57] cutting aid between recipient A [06:45:59] and donor B [06:46:01] or recipient A prime donor B prime [06:46:03] has very different market [06:46:05] market access implications [06:46:07] there is certainly a way to do it smartly [06:46:09] that you cut [06:46:11] the aid that is giving you the least [06:46:13] market access for us etc [06:46:15] no, absolutely, there is a ton of heterogeneity [06:46:18] we did it both ways so the first table [06:46:20] was like cut all aid [06:46:22] and then the bar charts were like [06:46:24] we are cutting pair by pair [06:46:26] we cut every pair [06:46:34] basically only 1% of [06:46:36] $8 in the world over this period [06:46:38] pay for themselves [06:46:40] but you know [06:46:42] there is still variation [06:46:44] some pay [06:46:46] 50% some pay almost 0 etc [06:46:48] so there is still a ton of variation [06:46:55] I [06:46:57] haven't checked but we could, yeah [06:46:59] let's do it over coffee [06:47:31] but let me give you 10 or 15 seconds [06:47:33] if there is a last word that you want to provide [06:47:35] okay great, coffee [06:47:37] thank you