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Aid and Growth: Politics Matters

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  • Matteo Bobba
  • Andrew Powell

Abstract

The literature on aid effectiveness has focused more on recipient policies than the determinants of aid allocation yet a consistent result is that political allies obtain more aid from donors than non-allies. This paper shows that aid allocated to political allies is ineffective for growth, whereas aid extended to countries that are not allies is highly effective. The result appears to be robust across different specifications and estimation techniques. In particular, new methods are employed to control for endogeneity. The paper suggests that aid allocation should be scrutinized carefully to make aid as effective as possible.

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File URL: http://www.iadb.org/research/pub_hits.cfm?pub_id=WP-601&pub_file_name=pubWP-601.pdf
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Bibliographic Info

Paper provided by Inter-American Development Bank, Research Department in its series Research Department Publications with number 4511.

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Date of creation: Jan 2007
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Handle: RePEc:idb:wpaper:4511

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References

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  1. Stephen Bond & Anke Hoeffler & Jonathan Temple, 2001. "GMM Estimation of Empirical Growth Models," Economics Papers 2001-W21, Economics Group, Nuffield College, University of Oxford.
  2. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers 0284, National Bureau of Economic Research, Inc.
  3. David H. Romer & Jeffrey A. Frankel, 1999. "Does Trade Cause Growth?," American Economic Review, American Economic Association, vol. 89(3), pages 379-399, June.
  4. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  5. William Easterly & Ross Levine & David Roodman, 2003. "New Data, New Doubts: Revisiting "Aid, Policies, and Growth"," Working Papers 26, Center for Global Development.
  6. Dollar, David & Alesina, Alberto, 2000. "Who Gives Foreign Aid to Whom and Why?," Scholarly Articles 4553020, Harvard University Department of Economics.
  7. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September.
  8. James H. Stock & Jonathan Wright, 2000. "GMM with Weak Identification," Econometrica, Econometric Society, vol. 68(5), pages 1055-1096, September.
  9. Alberto Chong & Mark Gradstein, 2006. "Who’s Afraid of Foreign Aid? The Donors’ Perspective," CESifo Working Paper Series 1833, CESifo Group Munich.
  10. Michael A. Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting chickens when they hatch: The short-term effect of aid on growth," International Finance 0407010, EconWPA.
  11. David Roodman, 2004. "The Anarchy of Numbers: Aid, Development, and Cross-country Empirics," Development and Comp Systems 0412003, EconWPA.
  12. Raghuram Rajan & Arvind Subramanian, 2005. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," IMF Working Papers 05/127, International Monetary Fund.
  13. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  14. William R. Hauk & Romain Wacziarg, 2004. "A Monte Carlo Study of Growth Regressions," NBER Technical Working Papers 0296, National Bureau of Economic Research, Inc.
  15. R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
  16. Matteo Bobba & Andrew Powell, 2006. "Multilateral Intermediation of Foreign Aid: What is the Trade-Off for Donor Countries?," Research Department Publications 4500, Inter-American Development Bank, Research Department.
  17. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  18. Collier, Paul & Hoeffler, Anke, 2002. "Military expenditure - threats, aid, and arms races," Policy Research Working Paper Series 2927, The World Bank.
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Citations

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Cited by:
  1. Pietro Alessandrini & Andrea Presbitero, 2012. "Low-Income Countries and an SDR-based International Monetary System," Open Economies Review, Springer, vol. 23(1), pages 129-150, February.
  2. Oscar Becerra & Eduardo Cavallo & Ilan Noy, 2010. "In the Aftermath of Large Natural Disasters, what happens to foreign aid?," Working Papers 201018, University of Hawaii at Manoa, Department of Economics.
  3. Sanjay Reddy & Camelia Minoiu, 2009. "Development Aid and Economic Growth: A Positive Long-Run Relation," IMF Working Papers 09/118, International Monetary Fund.
  4. Harrigan, Jane & Wang, Chengang, 2011. "A New Approach to the Allocation of Aid Among Developing Countries: Is the USA Different from the Rest?," World Development, Elsevier, vol. 39(8), pages 1281-1293, August.
  5. Pietro Alessandrini & Andrea Filippo Presbitero, 2011. "Low-Income Countries Vulnerabilities and the Need for an SDR-Based International Monetary System," Mo.Fi.R. Working Papers 55, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  6. Acharya, Arnab & Alvarez, Melisa Mart.nez, 2012. "Aid Effectiveness in the Health Sector," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  7. Emilio Sacerdoti & Gonzalo Salinas & Abdikarim Farah, 2009. "The Macroeconomic Impact of Scaled-up Aid: The Case of Niger," IMF Working Papers 09/36, International Monetary Fund.

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