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Where Did All the Aid Go? An Empirical Analysis of Absorption and Spending

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Author Info
Shekhar Aiyar
Ummul Ruthbah

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Abstract

This paper examines the macroeconomic usage of aid using panel data for a broad sample of aid-recipients. By definition an increase in aid must go toward a reduction in the current account balance (absorbed aid), an increase in capital outflows, or reserve accumulation. It is found that short-run absorption is typically very low, with much aid exiting through the capital account. Moreover, aid spending, defined in terms of the increase in government fiscal expenditures as a result of aid, is significantly greater than aid absorption, implying that aid systematically leads to an injection of domestic liquidity in recipient economies. The evidence here may help illuminate the rather weak link between aid and growth found in the literature. It reinforces the case for greater coordination between fiscal and monetary authorities in response to aid inflows.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/34.

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Length: 34 pages
Date of creation: 06 Feb 2008
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Handle: RePEc:imf:imfwpa:08/34

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Keywords: Development assistance ; Government expenditures ; Consumption ; Investment ; Current account balances ;

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  1. Craig Burnside & David Dollar, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September. [Downloadable!] (restricted)
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  2. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October. [Downloadable!] (restricted)
  3. William Easterly & Ross Levine & David Roodman, 2003. "New Data, New doubts: A Comment on Burnside and Dollar's "Aid, Policies, and Growth" (2000)," NBER Working Papers 9846, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  4. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February. [Downloadable!] (restricted)
  5. Barry P. Bosworth & Susan M. Collins, 1999. "Capital Flows to Developing Economies: Implications for Saving and Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(1999-1), pages 143-180. [Downloadable!]
  6. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September. [Downloadable!] (restricted)
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  7. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April. [Downloadable!] (restricted)
  8. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06. [Downloadable!] (restricted)
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  9. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development. [Downloadable!]
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  10. Raghuram G. Rajan & Arvind Subramanian, 2005. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," NBER Working Papers 11513, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Alberto Alesina & Beatrice Weder, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," American Economic Review, American Economic Association, vol. 92(4), pages 1126-1137, September. [Downloadable!]
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