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Will the global financial crisis lead to lower foreign aid? A first look at United States ODA

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Author Info

  • Ronald U. Mendoza

    (UNICEF Division of Policy and Practice, Social Policy and Economic Analysis Unit)

  • Ryan Jones

    (Fordham University, Department of Economics, International Political Economy and Development (IPED) Program)

  • Gabriel Vergara

    (Fordham University, Department of Economics, International Political Economy and Development (IPED) Program)

Abstract

Analyzing US economic and foreign aid data from 1967 to 2007, this paper investigates whether adverse economic and financial conditions are negatively linked to official development assistance (ODA). It finds empirical evidence that US ODA has tended to decline as its economic conditions worsen. A 1 unit increase in the misery index (sum of inflation and unemployment) is associated with a roughly 0.01 percentage point decline in US ODA expressed as a share of GNI. Furthermore, an increase in financial volatility from 1 percent to 2 percent (measured by the standard deviation of the rate of return of the S&P500) is associated with a decrease in US ODA by about $2.78 billion. Informed by the empirical results in this paper, and based on very rough guesstimates, a potential decline in US ODA of anywhere from 13 to 30 percent could occur depending on the severity of the economic conditions in 2009. This predicted decline in ODA is much lower than some of the guesstimates so far by different analysts. Based on the US historical pattern, ODA is indeed at risk; nevertheless, it need not decline significantly during adverse economic times.

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Bibliographic Info

Paper provided by Fordham University, Department of Economics in its series Fordham Economics Discussion Paper Series with number dp2009-01.

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Date of creation: 2009
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Handle: RePEc:frd:wpaper:dp2009-01

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Web page: http://www.fordham.edu/economics/
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Keywords: ODA; foreign aid; financial crisis; misery index;

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  1. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  2. Younas, Javed, 2008. "Motivation for bilateral aid allocation: Altruism or trade benefits," European Journal of Political Economy, Elsevier, vol. 24(3), pages 661-674, September.
  3. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
  4. Chong, Alberto & Gradstein, Mark, 2008. "What determines foreign aid? The donors' perspective," Journal of Development Economics, Elsevier, vol. 87(1), pages 1-13, August.
  5. Anne Boschini & Anders Olofsg�rd, 2007. "Foreign aid: An instrument for fighting communism?," Journal of Development Studies, Taylor & Francis Journals, vol. 43(4), pages 622-648.
  6. Andrew Mold & Dilan Ölcer & Annalisa Prizon, 2008. "The Fallout from the Financial Crisis (3): Will Aid Budgets Fall Victim to the Credit Crisis?," OECD Development Centre Policy Insights 85, OECD Publishing.
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Citations

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Cited by:
  1. Andrea Filippo Presbitero, 2009. "The 2008-2009 Financial Crisis and the HIPCs: Another Debt Crisis?," Mo.Fi.R. Working Papers 29, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  2. Dang, Hai-Anh & Knack, Steve & Rogers, Halsey, 2009. "International aid and financial crises in donor countries," Policy Research Working Paper Series 5162, The World Bank.
  3. Das, Debasish Kumar & Dutta, Champa Bati, 2012. "Global financial crisis and foreign development assistance shocks in least developing countries," MPRA Paper 40281, University Library of Munich, Germany.
  4. Sèna Kimm Gnangnon, 2013. "How do OECD donor countries distribute foreign aid among developing countries during their fiscal episodes?," Working Papers halshs-00786009, HAL.
  5. Franklin Allen and Giorgia Giovannetti, 2010. "Fragile Countries And The 2008-2009 Crisis," RSCAS Working Papers 2010/13, European University Institute.
  6. Sèna Kimm Gnangnon, 2011. "The consequences of Fiscal Episodes in OECD Countries for Aid Supply," Working Papers halshs-00613161, HAL.
  7. Era Dabla-Norris & Camelia Minoiu & Luis-Felipe Zanna, 2010. "Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence," IMF Working Papers 10/240, International Monetary Fund.
  8. Gravier-Rymaszewska, Joanna, 2012. "How Aid Supply Responds to Economic Crises: A Panel VAR Approach," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).

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