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Aid, Volatility and Growth,with special reference to Africa

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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 two 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, hence 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 in Africa. We first show that aid, even if volatile, is not clearly as pro-cyclical as often argued, and that, even if pro-cyclical, is not necessarily destabilizing. We measure aid volatility by two 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 aid and the volatility of the a aid plus exports. We then evidence through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to a stabilizing effect. Finally we consider the implications of this effect for income volatility.

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Paper provided by HAL in its series Working Papers with number halshs-00557163.

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Date of creation: 18 Jan 2011
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Handle: RePEc:hal:wpaper:halshs-00557163

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Keywords: cerdi;

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References

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  1. Patrick GUILLAUMONT & Lisa CHAUVET, 1999. "Aid and Performance: A Reassessment," Working Papers 199910, CERDI.
  2. Bulir, Ales & Hamann, A. Javier, 2001. "How Volatile and Unpredictable are Aid Flows, and What are the Policy Implications?," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  3. Reinhart, Carmen & Kaminsky, Graciela & Vegh, Carlos, 2004. "When it rains, it pours: Procyclical capital flows and macroeconomic policies," MPRA Paper 13883, University Library of Munich, Germany.
  4. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, Elsevier, vol. 30(12), pages 2071-2088, December.
  5. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, Elsevier, vol. 36(10), pages 2048-2066, October.
  6. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  7. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
  8. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
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Cited by:
  1. Patrick Guillaumont & Sylviane Guillaumont Jeanneney, 2011. "Big Push versus Absorptive Capacity: How to Reconcile the Two Approaches," Working Papers halshs-00564565, HAL.

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