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International aid and financial crises in donor countries

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  • Dang, Hai-Anh
  • Knack, Stephen
  • Rogers, F. Halsey

Abstract

The recent global financial crisis placed new economic and fiscal pressures on donor countries that may have long-term effects on their ability and willingness to provide aid. Not only did donor-country incomes fall, but the cause of the drop — the banking and financial-sector crisis — may exacerbate the long-term effect on aid flows. This paper estimates how donor-country banking crises have affected aid flows in the past, using panel data from 24 donor countries between 1977 and 2010. We find that banking crises in donor countries are associated with a substantial additional fall in aid flows, beyond any income-related effects, at least in part because of the high fiscal costs of crisis and the debt hangover in the post-crisis periods. Aid flows from crisis-affected countries are estimated to fall by 28% or more (relative to the counterfactual) and to bottom out only about a decade after the banking crisis hits. In addition, our results confirm that donor-country incomes are robustly related to per-capita aid flows, with an elasticity of about 3. Findings are robust to estimation using either static or dynamic panel data methods to account for possible biases. Because many donor countries, which together provide two-thirds of aid, were hit hard by the global recession, this historical evidence indicates that aggregate aid could fall by a significant amount (again, relative to counterfactual) in the coming years. We also explore how crises affect different types of aid, such as social-sector and humanitarian aid, as well as whether strategic interaction among donors is likely to deepen or mitigate the fall in aid.

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Bibliographic Info

Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 232-250

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Handle: RePEc:eee:poleco:v:32:y:2013:i:c:p:232-250

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Web page: http://www.elsevier.com/locate/inca/505544

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Keywords: Foreign aid; Financial crises;

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References

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Citations

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Cited by:
  1. Debasish Kumar Das & Champa Bati Dutta, 2013. "Global Financial Crisis And Foreign Development Assistance Shocks In Least Developing Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 1-41, June.
  2. Sara Guerschanik Calvo, 2010. "The Global Financial Crisis of 2008-10: A View from the Social Sectors," Human Development Research Papers (2009 to present), Human Development Report Office (HDRO), United Nations Development Programme (UNDP) HDRP-2010-18, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).
  3. Maureen Lewis & Marijn Verhoeven, 2010. "Financial Crises and Social Spending : The Impact of the 2008-2009 Crisis," World Bank Other Operational Studies 12965, The World Bank.
  4. Justin Yifu Lin & Doerte Doemeland, 2012. "Beyond Keynesianism: Global Infrastructure Investments In Times Of Crisis," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1250015-1-1.
  5. Weist, Dana & Togo, Eriko & Prasad, Abha, 2010. "Crisis preparedness and debt management in low income countries : strengthening institutions and policy frameworks," Policy Research Working Paper Series 5372, The World Bank.
  6. Gravier-Rymaszewska, Joanna, 2012. "How Aid Supply Responds to Economic Crises: A Panel VAR Approach," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Era Dabla-Norris & Camelia Minoiu & Luis-Felipe Zanna, 2010. "Business Cycle Fluctuations, Large Shocks, and Development Aid," IMF Working Papers 10/240, International Monetary Fund.
  8. Robert Shelburne, 2010. "The Global Financial Crisis and Its Impact on Trade: The World and the European Emerging Economies," ECE Discussion Papers Series, UNECE 2010_2, UNECE.
  9. Andrea Filippo Presbitero, 2013. "Aid and Vulnerability," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 88, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  10. Andrea Filippo Presbitero & Alberto Zazzaro, 2010. "The Global Crisis in Low- and Middle-Income Countries: How the IMF Responded," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 35, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  11. Isabel Ortiz & Jingqing Chai & Matthew Cummins, 2011. "Identifying Fiscal Space:Options for Social and Economic Development for Children and Poor Households in 184 Countries," Working papers, UNICEF,Division of Policy and Strategy 1108, UNICEF,Division of Policy and Strategy.
  12. Sèna Kimm Gnangnon, 2011. "The consequences of Fiscal Episodes in OECD Countries for Aid Supply," Working Papers halshs-00613161, HAL.
  13. Sèna Kimm Gnangnon, 2013. "How do OECD donor countries distribute foreign aid among developing countries during their fiscal episodes?," Working Papers halshs-00786009, HAL.

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