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Why Aid-to-GDP Ratios?

Author

Listed:
  • Kurt Annen

    (Department of Economics and Finance, University of Guelph, Guelph ON Canada)

  • Stephen Kosempel

    (Department of Economics and Finance, University of Guelph, Guelph ON Canada)

Abstract

Virtually all aid-growth regression studies normalize aid by dividing it by GDP. This paper questions the usefulness of this practice: First, there are no clear theoretical reasons for this practice unless one assumes that donors allocate aid-to-GDP ratios. Second, using aid-to-GDP ratios introduces econometric problems that most likely introduce a downward bias for the aid-growth relationship. We illustrate this point by running simulations in which aid does not affect growth by construction but find strong negative and in some cases also positive correlations when using aid-to-GDP ratios. Finally, we replicate the Burnside-Dollar study and show that there is a significant positive relationship between aid and growth when using total aid instead of the aid-to-GDP ratio. We present a similar finding when estimating aid-growth regressions using data for the last 20 years (1995--2014).

Suggested Citation

  • Kurt Annen & Stephen Kosempel, 2018. "Why Aid-to-GDP Ratios?," Working Papers 1801, University of Guelph, Department of Economics and Finance.
    • Handle: RePEc:gue:guelph:2018-01
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    File URL: http://www.uoguelph.ca/economics/repec/workingpapers/2018/2018-01.pdf
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    References listed on IDEAS

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    1. Momita, Yasuaki & Matsumoto, Tomoya & Otsuka, Keijiro, 2019. "Has ODA contributed to growth? An assessment of the impact of Japanese ODA," Japan and the World Economy, Elsevier, vol. 49(C), pages 161-175.

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    More about this item

    Keywords

    Aid Effectiveness; aid and growth; growth convergence;
    All these keywords.

    JEL classification:

    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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