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Aid, Volatility, and Growth Again: When Aid Volatility Matters and When it Does Not

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  • Lisa Chauvet
  • Patrick Guillaumont

Abstract

In previous papers the authors have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e. that aid is more effective in countries which are more vulnerable to external shocks). Recently an important debate has emerged about the possible negative effects of aid volatility itself. However, the cushioning effect of aid may involve some volatility in aid flows, which then is not necessarily negative for growth. In this paper the authors examine to what extent the time profile of aid disbursements may contribute to an increase or a decrease of aid effectiveness. They first show that aid, even if volatile, is not clearly as pro-cyclical as is often argued, and, even if pro-cyclical, is not necessarily destabilizing. They measure aid volatility by several methods and assess pro-cyclicality of aid with respect to exports, thus departing from previous literature, which usually assess pro-cyclicality of aid with respect to national income or fiscal receipts. The stabilizing/destabilizing nature of aid is measured by the difference in the volatility of exports and the volatility of the aid plus export flows. Then, in order to take into account the diversity of shocks to which aid can respond, they consider the effect of aid on income volatility and again find that aid is making growth more stable, while its volatility reduces this effect. They finally show through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to its stabilizing effect. Copyright 2009 The Authors. Journal compilation 2009 Blackwell Publishing Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Review of Development Economics.

Volume (Year): 13 (2009)
Issue (Month): s1 (08)
Pages: 452-463

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Handle: RePEc:bla:rdevec:v:13:y:2009:i:s1:p:452-463

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References

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Citations

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Cited by:
  1. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Economics Bulletin, AccessEcon, vol. 6(41), pages 1-16.
  2. Yousuf, Ahmed Sadek, 2012. "Assessing Impact of Health Oriented Aid on Infant Mortality Rates," EconStor Preprints 67391, ZBW - German National Library of Economics.
  3. Irene Yackovlev & Victor Duarte Lledo & Lucie Gadenne, 2009. "Cyclical Patterns of Government Expenditures in Sub-Saharan Africa," IMF Working Papers 09/274, International Monetary Fund.
  4. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Post-Print hal-00331902, HAL.
  5. Patrick GUILLAUMONT & Maëlan LE GOFF, 2010. "Aid and remittances: their stabilizing impact compared," Working Papers P12, FERDI.
  6. Kathavate, Jay, 2013. "Direct & Indirect Effects of Aid Volatility on Growth: Do Stronger Institutions Play a Role?," MPRA Paper 45187, University Library of Munich, Germany.
  7. Yousuf, Ahmed Sadek, 2012. "Impact of Health Aid on Infant Mortality Rate," MPRA Paper 42945, University Library of Munich, Germany, revised 12 Oct 2012.
  8. Sampawende Jules TAPSOBA & Sylviane GUILLAUMONT JEANNENEY, 2009. "Pro cyclicité de la politique budgétaire et surveillance multilatérale dans les unions monétaires africaines," Working Papers 200904, CERDI.
  9. Aurore Gary & Mathilde Maurel, 2013. "The effect of donors' policy coherence on growth," Documents de travail du Centre d'Economie de la Sorbonne 13046, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  10. Kumar, Ronald/R, 2011. "Role of Trade, Aid, Remittances and Financial Development in Pakistan," MPRA Paper 38871, University Library of Munich, Germany.
  11. Guillaumont, Patrick, 2008. "An Economic Vulnerability Index: Its Design and Use for International Development Policy," Working Paper Series RP2008/99, World Institute for Development Economic Research (UNU-WIDER).
  12. Rohen D'Aiglepierre & Laurent Wagner, 2011. "Aid and Universal Primary Education," Working Papers halshs-00552241, HAL.
  13. Patrick GUILLAUMONT & Maëlan LE GOFF, 2010. "Aid and remittances: their stabilizing impact compared," Working Papers P12, FERDI.
  14. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY, 2009. "Accounting for Vulnerability of African Countries in Performance Based Aid Allocation," Working Papers P08, FERDI.
  15. Ahmed, Junaid & Martinez-Zarzoso, Inmaculada, 2013. "Blessing or curse: The stabilizing role of remittances, foreign aid and FDI to Pakistan," Center for European, Governance and Economic Development Research Discussion Papers 153, University of Goettingen, Department of Economics.
  16. Patrick GUILLAUMONT & Laurent WAGNER, 2014. "Aid effectiveness for poverty reduction: lessons from cross-country analyses, with a special focus on vulnerable countries," Working Papers P96, FERDI.
  17. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY, 2009. "Accounting for Vulnerability of African Countries in Performance Based Aid Allocation," Working Papers P08, FERDI.

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