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Aid, Volatility and Growth Again. When Aid Volatility Matters and When it Does Not

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  • Lisa Chauvet

    (DIAL - Développement, institutions et analyses de long terme - IRD)

  • Patrick Guillaumont

    (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)

Abstract

In previous papers we have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e. that aid is more effective in countries which are more vulnerable to external shocks). Recently an important debate has emerged about the possible negative effects of aid volatility itself. However, the cushioning effect of aid may involve some volatility in aid flows, which then is not necessarily negative for growth. In this paper we examine to what extent the time profile of aid disbursements may contribute to an increase or a decrease of aid effectiveness. We first show that aid, even if volatile, is not clearly as pro-cyclical as often argued, and, even if pro-cyclical, is not necessarily destabilizing. We measure aid volatility by several methods and assess pro-cyclicality of aid with respect to exports, thus departing from previous literature, which usually assess pro-cyclicality of aid with respect to national income or fiscal receipts. The stabilizing/destabilizing nature of aid is measured by the difference in the volatility of exports and the volatility of the aid plus exports flows. Then, in order to take into account the diversity of shocks to which aid can respond, we consider the effect of aid on income volatility and again find that aid is making growth more stable, while its volatility reduces this effect. We finally evidence through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to its stabilizing effect.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00557123.

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Date of creation: 18 Jan 2011
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Handle: RePEc:hal:wpaper:halshs-00557123

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References

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  1. Fielding, David & Mavrotas, George, 2005. "The Volatility of Aid," Working Paper Series DP2005/06, World Institute for Development Economic Research (UNU-WIDER).
  2. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
  3. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank.
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  6. Stephane Pallage & Michel Robe, 1998. "Foreign Aid and the Business Cycle," Cahiers de recherche CREFE / CREFE Working Papers 63, CREFE, Université du Québec à Montréal.
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  13. McGillivray, Mark, 2003. "Aid Effectiveness and Selectivity: Integrating Multiple Objectives into Aid Allocations," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
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  16. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, vol. 36(10), pages 2048-2066, October.
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  18. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
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Citations

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Cited by:
  1. Kathavate, Jay, 2013. "Direct & Indirect Effects of Aid Volatility on Growth: Do Stronger Institutions Play a Role?," MPRA Paper 45187, University Library of Munich, Germany.
  2. Patrick GUILLAUMONT & Maëlan LE GOFF, 2010. "Aid and remittances: their stabilizing impact compared," Working Papers P12, FERDI.
  3. Ahmed, Junaid & Martinez-Zarzoso, Inmaculada, 2013. "Blessing or curse: The stabilizing role of remittances, foreign aid and FDI to Pakistan," Center for European, Governance and Economic Development Research Discussion Papers 153, University of Goettingen, Department of Economics.
  4. Yousuf, Ahmed Sadek, 2012. "Assessing Impact of Health Oriented Aid on Infant Mortality Rates," MPRA Paper 43212, University Library of Munich, Germany, revised 10 Dec 2012.
  5. Sampawende Jules TAPSOBA & Sylviane GUILLAUMONT JEANNENEY, 2009. "Pro cyclicité de la politique budgétaire et surveillance multilatérale dans les unions monétaires africaines," Working Papers 200904, CERDI.
  6. Guillaumont, Patrick, 2008. "An Economic Vulnerability Index: Its Design and Use for International Development Policy," Working Paper Series RP2008/99, World Institute for Development Economic Research (UNU-WIDER).
  7. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY, 2009. "Accounting for Vulnerability of African Countries in Performance Based Aid Allocation," Working Papers P08, FERDI.
  8. Aurore Gary & Mathilde Maurel, 2013. "The effect of donors' policy coherence on growth," Documents de travail du Centre d'Economie de la Sorbonne 13046, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  9. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY, 2009. "Accounting for Vulnerability of African Countries in Performance Based Aid Allocation," Working Papers P08, FERDI.
  10. Rohen D'Aiglepierre & Laurent Wagner, 2011. "Aid and Universal Primary Education," Working Papers halshs-00552241, HAL.
  11. Patrick GUILLAUMONT & Laurent WAGNER, 2014. "Aid effectiveness for poverty reduction: lessons from cross-country analyses, with a special focus on vulnerable countries," Working Papers P96, FERDI.
  12. Kumar, Ronald/R, 2011. "Role of Trade, Aid, Remittances and Financial Development in Pakistan," MPRA Paper 38871, University Library of Munich, Germany.
  13. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Post-Print hal-00331902, HAL.
  14. Irene Yackovlev & Victor Duarte Lledo & Lucie Gadenne, 2009. "Cyclical Patterns of Government Expenditures in Sub-Saharan Africa," IMF Working Papers 09/274, International Monetary Fund.
  15. Patrick GUILLAUMONT & Maëlan LE GOFF, 2010. "Aid and remittances: their stabilizing impact compared," Working Papers P12, FERDI.
  16. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Economics Bulletin, AccessEcon, vol. 6(41), pages 1-16.
  17. Yousuf, Ahmed Sadek, 2012. "Impact of Health Aid on Infant Mortality Rate," MPRA Paper 42945, University Library of Munich, Germany, revised 12 Oct 2012.

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