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Volatility of Development Aid: From the Frying Pan into the Fire?

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  • Bulír, Ales
  • Hamann, A. Javier

Abstract

Summary The paper, building on the authors' previous analysis, examines the relative volatility of aid flows into developing countries and their domestic revenue, using new data, and three alternative measures of aid instability (relative volatility vis-à-vis fiscal revenue, unpredictability of aid disbursement relative to commitments, and failure of aid to smooth fluctuations in aggregate income). It finds that the volatility of aid flows is still much greater than that of domestic revenue and that this difference is not decreasing. Especially in very poor, aid-dependent countries, this high volatility of inflows makes the macroeconomy hard to manage. Further, the influence of aid has been procyclical and not countercyclical: aid has failed to act either as a stabilizing force or as an insurance mechanism. We argue that, to counter these unwelcome trends, donors need to be able to respond more speedily and effectively to large adverse shocks, and their conditionalities need to become more flexible--possibilities explicitly discussed elsewhere in this Special Section.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 36 (2008)
Issue (Month): 10 (October)
Pages: 2048-2066

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Handle: RePEc:eee:wdevel:v:36:y:2008:i:10:p:2048-2066

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Web page: http://www.elsevier.com/locate/worlddev

Related research

Keywords: external aid ODA volatility predictability developing countries;

References

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  1. Sanjeev Gupta & Catherine A. Pattillo & Smita Wagh, 2006. "Are Donor Countries Giving More or Less Aid?," IMF Working Papers 06/1, International Monetary Fund.
  2. Sweta Chaman Saxena & Valerie Cerra, 2005. "Growth Dynamics," IMF Working Papers 05/147, International Monetary Fund.
  3. Fielding, David & Mavrotas, George, 2005. "The Volatility of Aid," Working Paper Series DP2005/06, World Institute for Development Economic Research (UNU-WIDER).
  4. Griffin, Keith B & Enos, J L, 1970. "Foreign Assistance: Objectives and Consequences," Economic Development and Cultural Change, University of Chicago Press, vol. 18(3), pages 313-27, April.
  5. Robert Lensink & Oliver Morrissey, 2000. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," Journal of Development Studies, Taylor & Francis Journals, vol. 36(3), pages 31-49.
  6. Michel A. Robe & Stephane Pallage, 2000. "Foreign Aid And The Business Cycle," Computing in Economics and Finance 2000 107, Society for Computational Economics.
  7. Valerie Cerra & Sweta Chaman Saxena, 2007. "Growth dynamics: the myth of economic recovery," BIS Working Papers 226, Bank for International Settlements.
  8. Sanjeev Gupta & Catherine Pattillo & Smita Wagh, 2006. "Are Donor Countries Giving More or Less Aid?," Review of Development Economics, Wiley Blackwell, vol. 10(3), pages 535-552, 08.
  9. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  10. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  11. Nancy Birdsall, 2004. "Seven Deadly Sins: Reflections on Donor Failings," Working Papers 50, Center for Global Development.
  12. A. Javier Hamann & Ales Bulir, 2006. "Volatility of Development Aid," IMF Working Papers 06/65, International Monetary Fund.
  13. Torsvik, Gaute, 2005. "Foreign economic aid; should donors cooperate?," Journal of Development Economics, Elsevier, vol. 77(2), pages 503-515, August.
  14. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
  15. Stephane Pallage & Michel A. Robe, 2003. "On the Welfare Cost of Economic Fluctuations in Developing Countries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(2), pages 677-698, 05.
  16. Erwin Tiongson & Benedict J. Clements & Sanjeev Gupta, 2003. "Foreign Aid and Consumption Smoothing," IMF Working Papers 03/40, International Monetary Fund.
  17. Stéphane Pallage & Michel A. Robe & Catherine Bérubé, 2006. "The Potential of Foreign Aid as Insurance," IMF Staff Papers, Palgrave Macmillan, vol. 53(3), pages 5.
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