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Geopolitics and the effect of foreign aid on economic growth: 1970-2001

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  • Derek Headey

    (School of Economics, The University of Queensland, Australia)

Abstract

Previous aid effectiveness research often claims that foreign aid has been unsuccessful in increasing growth rates. This result could be due either to methodological weaknesses, or to genuine aid efficiency losses. Empirically, the author finds that once the best available techniques are employed, aid has a significant but moderate average effect on growth over the period 1970-2001. A promising explanation of why the estimated returns to aid are not larger is that bilateral aid had no significant effect on growth during the Cold War (pre-1990), but had a significant and sizeable effect thereafter. In contrast, multilateral aid seems to have had sizeable and significant effects throughout. These results imply that the negative conclusions drawn by earlier research should be interpreted in their proper historical context, rather than as a necessary condemnation of current aid effectiveness. Copyright © 2007 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jid.1395
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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

Volume (Year): 20 (2008)
Issue (Month): 2 ()
Pages: 161-180

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Handle: RePEc:wly:jintdv:v:20:y:2008:i:2:p:161-180

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Web page: http://www3.interscience.wiley.com/journal/5102/home

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  1. Gomanee, Karuna & Girma, Sourafel & Morrissey, Oliver, 2005. "Aid and Growth in Sub-Saharan Africa: Accounting for Transmission Mechanisms," Working Paper Series RP2005/60, World Institute for Development Economic Research (UNU-WIDER).
  2. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
  3. Berthelemy, Jean-Claude & Tichit, Ariane, 2004. "Bilateral donors' aid allocation decisions--a three-dimensional panel analysis," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 253-274.
  4. William Easterly, 2003. "National Policies and Economic Growth: A Reappraisal," Working Papers 27, Center for Global Development.
  5. Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
  6. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
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  8. Christopher Kilby, 2006. "Donor influence in multilateral development banks: The case of the Asian Development Bank," The Review of International Organizations, Springer, vol. 1(2), pages 173-195, June.
  9. Raghuram Rajan & Arvind Subramanian, 2005. "Aid and Growth," IMF Working Papers 05/127, International Monetary Fund.
  10. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  11. Axel Dreher & Nathan Jensen, 2003. "Independent Actor or Agent? An Empirical Analysis of the impact of US interests on IMF Conditions," International Finance 0310004, EconWPA, revised 08 Jan 2004.
  12. Mark McGillivray & Simon Feeny & Niels Hermes & Robert Lensink, 2006. "Controversies over the impact of development aid: it works; it doesn't; it can, but that depends …," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(7), pages 1031-1050.
  13. Rati Ram, 2004. "Recipient country's 'policies' and the effect of foreign aid on economic growth in developing countries: additional evidence," Journal of International Development, John Wiley & Sons, Ltd., vol. 16(2), pages 201-211.
  14. Raghuram G. Rajan & Arvind Subramanian, 2005. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," NBER Working Papers 11513, National Bureau of Economic Research, Inc.
  15. Michael P. Murray, 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments," Journal of Economic Perspectives, American Economic Association, vol. 20(4), pages 111-132, Fall.
  16. Collier, Paul & Hoeffler, Anke, 2004. "Aid, policy and growth in post-conflict societies," European Economic Review, Elsevier, vol. 48(5), pages 1125-1145, October.
  17. Howard White, 2001. "Will the new aid agenda help promote poverty reduction?," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(7), pages 1057-1070.
  18. Harrigan, Jane & Wang, Chengang & El-Said, Hamed, 2006. "The economic and political determinants of IMF and world bank lending in the Middle East and North Africa," World Development, Elsevier, vol. 34(2), pages 247-270, February.
  19. Georgios Karras, 2006. "Foreign aid and long-run economic growth: empirical evidence for a panel of developing countries," Journal of International Development, John Wiley & Sons, Ltd., vol. 18(1), pages 15-28.
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Citations

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Cited by:
  1. Paul Clist & Alessia Isopi & Oliver Morrissey, 2012. "Selectivity on aid modality: Determinants of budget support from multilateral donors," The Review of International Organizations, Springer, vol. 7(3), pages 267-284, September.
  2. Dreher, Axel & Klasen, Stephan & Vreeland, James Raymond & Werker, Eric, 2010. "The Costs of Favoritism: Is Politically-Driven Aid Less Effective?," IZA Discussion Papers 4820, Institute for the Study of Labor (IZA).
  3. Yu Wang & Shuai Jin, 2013. "Veto players and foreign aid provision," Constitutional Political Economy, Springer, vol. 24(1), pages 43-56, March.
  4. Paul Clist, . "25 Years of Aid Allocation Practice: Comparing Donors and Eras," Discussion Papers 09/11, University of Nottingham, CREDIT.
  5. Temple, Jonathan R.W., 2010. "Aid and Conditionality," Handbook of Development Economics, Elsevier.
  6. Clist, Paul, 2011. "25Years of Aid Allocation Practice: Whither Selectivity?," World Development, Elsevier, vol. 39(10), pages 1724-1734.
  7. Axel Dreher & Vera Eichenauer & Kai Gehring, 2013. "Geopolitics, Aid and Growth," CESifo Working Paper Series 4299, CESifo Group Munich.
  8. Galiani, Sebastian & Knack, Stephen & Xu, Lixin Colin & Zou, Ben, 2014. "The effect of aid on growth : evidence from a quasi-experiment," Policy Research Working Paper Series 6865, The World Bank.
  9. Wamboye, Evelyn, 2012. "Quantity or quality? foreign aid implications on economic growth in least developed countries," MPRA Paper 39518, University Library of Munich, Germany.
  10. Axel Dreher & Anna Minasyan & Peter Nunnenkamp, 2013. "Government Ideology in Donor and Recipient Countries: Does Political Proximity Matter for the Effectiveness of Aid?," Kiel Working Papers 1870, Kiel Institute for the World Economy.
  11. Dreher, Axel & Klasen, Stephan & Raymond, James & Werker, Eric, 2010. "The costs of favoritism: Is politically-driven aid less effective?," Center for European, Governance and Economic Development Research Discussion Papers 97, University of Goettingen, Department of Economics.

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