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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)

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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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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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Related research
Keywords: ODA; foreign aid; financial crisis; misery index;

Find related papers by JEL classification:
F35 - International Economics - - International Finance - - - Foreign Aid
G01 - Financial Economics - - General - - - Financial Crises
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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References listed on IDEAS
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  1. 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. [Downloadable!] (restricted)
  2. 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, Development Centre. [Downloadable!]
  3. Chong, Alberto & Gradstein, Mark, 2008. "What determines foreign aid? The donors' perspective," Journal of Development Economics, Elsevier, vol. 87(1), pages 1-13, August. [Downloadable!] (restricted)
  4. Alesina, Alberto & Dollar, David, 2000. " Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March. [Downloadable!] (restricted)
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  5. Luc Laeven & Fabian Valencia, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund. [Downloadable!]
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This page was last updated on 2009-11-6.


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