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Aid instability, aid effectiveness and economic growth

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  • Qiaoqiao Liu
  • Zenggang Li

Abstract

Motivation Despite large flows of official development assistance, the performance of recipient economies has been discouraging. Aid effectiveness, including the effect of instability of aid flows, has thus become a central concern. Purpose This article assesses the effect of unstable aid flows on aid effectiveness and economic growth. Approach and Methods We divide the aid effect into two stages: without‐aid and with‐aid. The impact of aid volatility is determined by the direction of volatility, the paths of aid and the incidence of its impact on the economy. The generalized method of moments (GMM) is applied to the panel data of 78 aid recipients from 2003 to 2017. Findings An open economy magnifies the impact of aid fluctuations (both positive and negative) for recipients highly dependent on aid. No statistically significant influence of aid volatility on growth can be seen. Volatility may however matter, since positive and negative impacts may offset each other. Aid unpredictability weakens aid efficiency and thus cripples growth. Policy Implications Donor agencies should make their assistance more predictable, above all in countries that depend heavily on aid.

Suggested Citation

  • Qiaoqiao Liu & Zenggang Li, 2022. "Aid instability, aid effectiveness and economic growth," Development Policy Review, Overseas Development Institute, vol. 40(1), January.
    • Handle: RePEc:bla:devpol:v:40:y:2022:i:1:n:e12542
    DOI: 10.1111/dpr.12542
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    1. Panika Jain & Samaresh Bardhan, 2023. "Energy aid volatility across developing countries: a disaggregated sectoral analysis," International Economics and Economic Policy, Springer, vol. 20(3), pages 457-483, July.

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