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Aid and Growth Accelerations: An Alternative Approach to Assess the Effectiveness of Aid

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  • Jonas Dovern
  • Peter Nunnenkamp

Abstract

It continues to be heavily disputed whether foreign aid promotes economic growth in developing countries. In most cross-country regressions, aid is considered effective only if it shifts recipient countries to a significantly higher and sustainable growth path. We apply an alternative approach which is less demanding, based on the concept of temporary growth accelerations suggested by Hausmann, Pritchett and Rodrik. In assessing what can reasonably be expected from the donors’ modest aid efforts, we do not only employ aggregate aid data but we also differentiate between major aid categories, including grants, loans and so-called short-impact aid. It turns out that aid flows have a small but significantly positive effect on the conditional probability of growth accelerations. This result holds across different estimation methods. Short-impact aid is found to be more effective in this respect, while we reject the view that grants are superior to loans. To the contrary, we find a stronger effect of loans. Furthermore, aid has become more effective during the second half of our sample. Typically, however, the significance of results crucially depends on the criteria applied to identify growth accelerations.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1296.

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Length: 26 pages
Date of creation: Sep 2006
Date of revision:
Handle: RePEc:kie:kieliw:1296

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Related research

Keywords: Aid Effectiveness; Growth Accelerations; Grants versus Loans; Short-Impact Aid;

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References

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  1. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  2. Hristos Doucouliagos & Martin Paldam, 2005. "Aid Effectiveness on Growth. A Meta Study," Economics Working Papers 2005-13, School of Economics and Management, University of Aarhus.
  3. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
  4. Axel Dreher & Peter Nunnenkamp & Rainer Thiele, 2006. "Does Aid for Education Educate Children? Evidence from Panel Data," Kiel Working Papers 1290, Kiel Institute for the World Economy.
  5. Wacziarg, Romain & Welch, Karen Horn, 2003. "Trade Liberalization and Growth: New Evidence," Research Papers 1826, Stanford University, Graduate School of Business.
  6. 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.
  7. Raghuram Rajan & Arvind Subramanian, 2005. "Aid and Growth," IMF Working Papers 05/127, International Monetary Fund.
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Cited by:
  1. Kerekes, Monika, 2007. "Analyzing patterns of economic growth: a production frontier approach," Discussion Papers 2007/15, Free University Berlin, School of Business & Economics.

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