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

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Author Info
Bulír, Ales
Hamann, A. Javier

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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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File URL: http://www.sciencedirect.com/science/article/B6VC6-4T7D8H5-1/2/c80b9f481632253dcd109badc59e4bfe
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Publisher 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

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Related research
Keywords: external aid ODA volatility predictability developing countries;

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  1. Christopher Adam & Stephen O’Connell & Edward Buffie, 2007. "Monetary Policy Rules For Manging Aid Surges In Africa," WEF Working Papers 0016, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
    Other versions:
  2. Yongzheng Yang & Sanjeev Gupta & Robert Powell, 2005. "The Macroeconomic Challenges of Scaling Up Aid to Africa," IMF Working Papers 05/179, International Monetary Fund. [Downloadable!]
  3. Raghbendra Jha & T. Palanivel, 2007. "Resource Augmentation for Meeting the Millennium Development Goals in the Asia Pacific Region," Departmental Working Papers 2007-02, Australian National University, Economics RSPAS. [Downloadable!]
    Other versions:
  4. Kang Yong Tan & David Vines, 2007. "Woodford goes to Africa," WEF Working Papers 0029, ESRC World Economy and Finance Research Programme, Birkbeck, University of London. [Downloadable!]
  5. Smita Wagh & Sanjeev Gupta & Catherine A. Pattillo, 2006. "Are Donor Countries Giving More or Less Aid?," IMF Working Papers 06/1, International Monetary Fund. [Downloadable!]
  6. Paolo Dudine & Markus Berndt & Abu Shonchoy & Jan Kees Martijn, 2008. "The Spending and Absorption of Aid in PRGF Supported Programs," IMF Working Papers 08/237, International Monetary Fund. [Downloadable!]
  7. Heller, Peter S. & Katz, Menachem & Debrun, Xavier & Thomas, Theo & Koranchelian, Taline & Adenauer, Isabell, 2006. "Making Fiscal Space Happen! Managing Fiscal Policy in a World of Scaled-Up Aid," Working Papers RP2006/125, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
    Other versions:
  8. 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:
  9. Paul Mosley & Abrar Suleiman, 2005. "Budget support, conditionality and poverty," Working Papers 2005012, The University of Sheffield, Department of Economics, revised Jun 2005. [Downloadable!]
  10. Kyriakos C. Neanidis & Dimitrios Varvarigos, 2007. "The Allocation of volatile aid and economic growth: Evidence and a suggestive theory," Discussion Paper Series 2007_07, Department of Economics, Loughborough University, revised Mar 2007. [Downloadable!]
  11. Yohane Khamfula, 2006. "Fiscal uncertainty with donor herding and domestic debt crisis," Working Papers 07/2006, Stellenbosch University, Department of Economics. [Downloadable!]
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