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Foreign Aid and Domestic Absorption

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  • Jonathan R. W. Temple
  • Nicolas Van de Sijpe

Abstract

We introduce a new ‘supply-push’ instrument for foreign aid, to be used together with an instrumental variable estimator that filters out interactive fixed effects. We use this instrument to study the effects of aid on macroeconomic ratios, and especially the ratios of consumption, investment, imports and exports to GDP. We cannot reject the hypothesis that aid is fully absorbed rather than used to build foreign reserves or exiting as capital flight, nor do we find evidence of Dutch Disease effects. Aid increases consumption, and there is also some evidence that aid raises investment, but with a delayed effect.

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File URL: http://www.csae.ox.ac.uk/workingpapers/pdfs/csae-wps-2014-01.pdf
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Paper provided by Centre for the Study of African Economies, University of Oxford in its series CSAE Working Paper Series with number 2014-01.

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Date of creation: 2014
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Handle: RePEc:csa:wpaper:2014-01

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  1. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 90(4), pages 643-665, November.
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  3. Nicolas Van de Sijpe, 2010. "Is foreign aid fungible? Evidence from the education and health sectors," CSAE Working Paper Series, Centre for the Study of African Economies, University of Oxford 2010-38, Centre for the Study of African Economies, University of Oxford.
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  5. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, Elsevier, vol. 40(2), pages 289-329, February.
  6. Breinlich, Holger & Ottaviano, Gianmarco & Temple, Jonathan, 2013. "Regional Growth and Regional Decline," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9568, C.E.P.R. Discussion Papers.
  7. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, Elsevier, vol. 79(1), pages 99-106, April.
  8. C. S. Adam & S. A. O'Connell, 1999. "Aid, Taxation and Development in Sub-Saharan Africa," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 11(3), pages 225-253, November.
  9. Kleibergen, F.R. & Paap, R., 2003. "Generalized Reduced Rank Tests using the Singular Value Decomposition," Econometric Institute Research Papers, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute EI 2003-01, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
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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 Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  13. Chudik, A. & Pesaran, M.H. & Tosetti, E., 2009. "Weak and Strong Cross Section Dependence and Estimation of Large Panels," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0924, Faculty of Economics, University of Cambridge.
  14. Harding, Matthew & Lamarche, Carlos, 2011. "Least squares estimation of a panel data model with multifactor error structure and endogenous covariates," Economics Letters, Elsevier, Elsevier, vol. 111(3), pages 197-199, June.
  15. Roland Hodler & Paul Raschky, 2010. "Foreign Aid and Enlightened Leaders," Development Research Unit Working Paper Series, Monash University, Department of Economics 54-10, Monash University, Department of Economics.
  16. Channing, Arndt & Jones, Sam & Tarp, Finn, 2010. "Aid, Growth, and Development Have We Come Full Circle?," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) wp2010-96, World Institute for Development Economic Research (UNU-WIDER).
  17. Eric Werker & Faisal Z. Ahmed & Charles Cohen, 2009. "How Is Foreign Aid Spent? Evidence from a Natural Experiment," American Economic Journal: Macroeconomics, American Economic Association, American Economic Association, vol. 1(2), pages 225-44, July.
  18. Michael A. Clemens & Steven Radelet & Rikhil R. Bhavnani & Samuel Bazzi, 2012. "Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 122(561), pages 590-617, 06.
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