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Foreign Aid and the Business Cycle

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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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Bibliographic 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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Keywords: Real business cycles; foreign aid; volatility;

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  1. Zambia on the verge of a Dutch disease?
    by Economic Logician in Economic Logic on 2008-04-21 08:02:00
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