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Foreign Aid and the Business Cycle

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Author Info
Stephane Pallage () (Center for Research on Economic Fluctuations and Employment, UQAM)
Michel Robe () (University of Miami)

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Abstract

We document the real business cycle properties of foreign aid to poor countries. We show that aid exhibits the following empirical regularities over a twenty-five year period. First, it represents a significant source of income for the recipients. Second, it is very volatile - two to three times as volatile as output. Third, for the vast majority of recipient countries in our sample, aid disbursements are procyclical. Whatever the intended purpose of aid, this procyclicality suggests that aid ends up acting as a reward (punishment) for good (bad) economic performance. In contrast, there is no clear pattern of procyclicality with the business cycle of the donors.

Nous documentons les propriétés cycliques de l'aide aux pays pauvres. Sur une période de vingt-cinq ans, nous identifions les régularités empiriques suivantes. Tout d'abord, l'aide constitue une source importante de revenu pour les pays receveurs. Deuxièmement, l'aide est très volatile - deux à trois fois plus volatile que le produit national. Troisièmement, les débours d'aide sont procycliques pour la grande majorité des pays de notre échantillon. Quel que soit le but véritable de l'aide, sa procyclicalité suggère qu'en définitive elle agit comme une récompense (une punition) pour bonne (mauvaise) performance économique. En ce qui concerne le cycle économique du donneur, la même procyclicalité de l'aide n'est pas observée.

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Publisher Info
Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 63.

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Length: 24 pages
Date of creation: Jun 1998
Date of revision:
Publication status: published in Review of International Economics, 9(4), pp. 637-668, November 2001 (version differs from working paper)
Handle: RePEc:cre:crefwp:63

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Related research
Keywords: Real business cycles; foreign aid; volatility;

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Find related papers by JEL classification:
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
F35 - International Economics - - International Finance - - - Foreign Aid

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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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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. 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!]
  2. K C Neanidis & D Varvarigos, 2005. "The Impact of Foreign Aid on Economic Growth: Volatility of Disbursements and Distribution of Receipts," Centre for Growth and Business Cycle Research Discussion Paper Series 56, Economics, The Univeristy of Manchester. [Downloadable!]
  3. Benedict J. Clements & Sanjeev Gupta & Erwin Tiongson, 2003. "Foreign Aid and Consumption Smoothing: Evidence from Global Food Aid," IMF Working Papers 03/40, International Monetary Fund. [Downloadable!]
  4. Rune Jansen Hagen, 2002. "Marginalisation in the Context of Globalisation: Why Is Africa so Poor?," Nordic Journal of Political Economy, Nordic Journal of Political Economy, vol. 28, pages 147-179. [Downloadable!]
  5. 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:
  6. Cristina Arellano & Aleš Bulir & Timothy D. Lane & Leslie Lipschitz, 2005. "The Dynamic Implications of Foreign Aid and Its Variability," IMF Working Papers 05/119, International Monetary Fund. [Downloadable!]
    Other versions:
  7. 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!]
  8. Stan du Plessis, 2006. "Business Cycles in Emerging market Economies: A New View of the Stylised Facts," Working Papers 02/2006, Stellenbosch University, Department of Economics. [Downloadable!]
  9. Fleck, Robert K. & Kilby, Christopher, 2009. "Changing Aid Regimes? U.S. Foreign Aid from the Cold War to the War on Terror," Villanova School of Business Department of Economics and Statistics Working Paper Series 1, Villanova School of Business Department of Economics and Statistics. [Downloadable!]
  10. Alex Cobham (QEH), . "Tax Evasion, Tax Avoidance and Development Finance," QEH Working Papers qehwps129, Queen Elizabeth House, University of Oxford. [Downloadable!]
  11. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Hansen, Henrik & Headey, Derek, 2007. "The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Timeseries Analysis," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
    Other versions:
  13. Headey, Derek & Malaiyandi, Sangeetha & Fan, Shenggen, 2009. "Navigating the perfect storm: Reflections on the food, energy, and financial crises," IFPRI discussion papers 889, International Food Policy Research Institute (IFPRI). [Downloadable!]
  14. Claudia M. Buch & Anja Kuckulenz & Marie-Helene Le Manchec, 2002. "Worker Remittances and Capital Flows," Kiel Working Papers 1130, Kiel Institute for the World Economy. [Downloadable!]
  15. Chauvet, Lisa & Guillaumont, Patrick, 2008. "Aid, Volatility and Growth Again: When Aid Volatility Matters and When It Does Not," Working Papers RP2008/78, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  16. Sayan, Serdar & Tekin-Koru, Ayca, 2007. "Remittances, Business Cycles and Poverty: The Recent Turkish Experience," MPRA Paper 6029, University Library of Munich, Germany. [Downloadable!]
  17. Addison, Tony & Mavrotas, George & McGillivray, Mark, 2005. "Development Assistance and Development Finance: Evidence and Global Policy Agendas," Working Papers RP2005/23, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  18. Tony Addison & George Mavrotas & Mark McGillivray, 2005. "Development assistance and development finance: evidence and global policy agendas," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(6), pages 819-836. [Downloadable!]
  19. 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!]
    Other versions:
  20. Serdar Sayan, 2006. "Business Cycles and Workers' Remittances: How Do Migrant Workers Respond to Cyclical Movements of GDP at Home?," IMF Working Papers 06/52, International Monetary Fund. [Downloadable!]
  21. 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!]
  22. Stephane Pallage & Michel Robe, 2000. "Magnitude X on the Richter Scale: Welfare Cost of Business Cycles in Developing Countries," Cahiers de recherche CREFE / CREFE Working Papers 124, CREFE, Université du Québec à Montréal. [Downloadable!]
    Other versions:
  23. Odedokun, Matthew, 2003. "Analysis of Deviations and Delays in Aid Disbursements," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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