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The dynamic implications of foreign aid and its variability

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Author Info
Arellano, Cristina
Bulír, Ales
Lane, Timothy
Lipschitz, Leslie

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Abstract

The paper examines the effects of aid and its volatility on consumption, investment, and the structure of production in the context of an intertemporal two-sector general equilibrium model, calibrated using data for aid-dependent countries in Africa. A permanent flow of aid mainly finances consumption rather than investment--consistent with the historical failure of aid inflows to translate into sustained growth. Large aid flows are associated with higher real exchange rates and smaller tradable sectors because aid is a substitute for tradable consumption. Aid volatility results in substantial welfare losses, providing a motivation for recent discussions of aid architecture stressing the need for greater predictability of aid. These results are also consistent with evidence from cross-country regressions of manufactured exports, presented later in the paper.

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Publisher Info
Article provided by Elsevier in its journal Journal of Development Economics.

Volume (Year): 88 (2009)
Issue (Month): 1 (January)
Pages: 87-102
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Handle: RePEc:eee:deveco:v:88:y:2009:i:1:p:87-102

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Related research
Keywords: C68 F35 F41 Real business cycle General equilibrium Aid Transfer problem;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  22. Arne Bigsten & Paul Collier & Stefan Dercon & Marcel Fafchamps & Bernard Gauthier & Jan Willem Gunning & Abena Oduro & Remco Oostendorp & Catherine Pattillo & Måns Söderbom & Francis Teal & Alb, 2004. "Do African Manufacturing Firms Learn from Exporting?," The Journal of Development Studies, Taylor and Francis Journals, vol. 40(3), pages 115-141, February. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Armah, Stephen & Nelson, Carl H., 2008. "Is Foreign Aid Beneficial for Sub-Saharan Africa? A Panel Data Analysis," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6356, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  2. Almuth Scholl, 2009. "Aid Effectiveness and Limited Enforceable Conditionality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(2), pages 377-391, April. [Downloadable!] (restricted)
    Other versions:
  3. Clarke, Matthew & Fry, Tim & Mihajilo, Sandra, 2007. "Aid Allocation Volatility to Small Island States," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  4. Thierry Tressel & Alessandro Prati, 2006. "Aid Volatility and Dutch Disease: Is There a Role for Macroeconomic Policies?," IMF Working Papers 06/145, International Monetary Fund. [Downloadable!]
  5. Wolf, Susanna, 2007. "Does Aid Improve Public Service Delivery?," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  6. Lennart Erickson & Carl-Johan Dalgaard, 2007. "Solow Versus Harrod-Domar: Reexamining the Aid Costs of the First Millennium Development Goal," IMF Working Papers 06/284, International Monetary Fund. [Downloadable!]
  7. Degol Hailu, 2007. "Scaling-up HIV/AIDS Financing and the Role of Macroeconomic Policies in Kenya," Conference Paper 4, International Policy Centre for Inclusive Growth. [Downloadable!]
  8. Peter Rangazas & Alex Mourmouras, 2006. "Foreign Aid Policy and Sources of Poverty: A Quantitative Framework," IMF Working Papers 06/14, International Monetary Fund. [Downloadable!]
  9. Serpil Tekin & Stephen J. Turnovsky & Valerie Cerra, 2008. "Foreign Aid and Real Exchange Rate Adjustments in a Financially Constrained Dependent Economy," IMF Working Papers 08/204, International Monetary Fund. [Downloadable!]
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  11. John Hudson & Paul Mosley, 2007. "Aid Volatility, Policy and Development," Working Papers 2007015, The University of Sheffield, Department of Economics, revised Oct 2007. [Downloadable!]
    Other versions:
  12. Mechler, Reinhard, 2009. "Disasters and economic welfare : can national savings help explain post-disaster changes in consumption ?," Policy Research Working Paper Series 4988, The World Bank. [Downloadable!]
  13. Aiyar, Shekhar & Berg, Andrew & Hussain, Mumtaz, 2008. "The Macroeconomic Management of Increased Aid: Policy Lessons from Recent Experience," Working Papers RP2008/79, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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  14. Guillaumont, Patrick & Guillaumont Jeanneney, Sylviane, 2007. "Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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  15. John Serieux, 2007. "Managing the Exchange Rate Consequences of an MDG-Related Scale-up in HIV/AIDS Financing," Conference Paper 1, International Policy Centre for Inclusive Growth. [Downloadable!]
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    Other versions:
  17. Pierre-Richard Agénor & Joshua Aizenman, 2007. "Aid Volatility and Poverty Traps," NBER Working Papers 13400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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