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The Return to Foreign Aid

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Author Info

  • Carl-Johan Dalgaard

    (Institute of Economics, University of Copenhagen)

  • Henrik Hansen

    (Institute of Economics, University of Copenhagen)

Abstract

This paper investigates the marginal productivity of investment in the world’s poorest economies. The aim is to estimate the return on investments financed by foreign aid as well as by domestic resource mobilization, using crosscountry aggregate data. In practice the return on both investment categories can be expected to vary considerably across countries and time. As a consequence we develop a correlated random coefficients approach to the issue at hand, which allows us to estimate the average aggregate rate of return on “aid investments” and “domestic investments”. Across a wide array of estimators our principal finding is remarkably robust; the average aggregate gross return on “aid investments” falls in a 20-30 percent range, roughly the same as the return on investments funded by other sources than aid. This finding is well in accord with micro estimates of the economic return to aid.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 05-04.

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Length: 23 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:kud:kuiedp:0504

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Related research

Keywords: productivity; foreign aid; random coefficients; panel data;

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References

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  1. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
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Citations

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Cited by:
  1. Finn Tarp, 2006. "Aid and Development," Discussion Papers 06-12, University of Copenhagen. Department of Economics.
  2. Andrew Berg & Rafael A Portillo & Luis-Felipe Zanna, 2014. "Policy Responses to Aid Surges in Countries with Limited International Capital Mobility: The Role of the Exchange Rate Regime," IMF Working Papers 14/18, International Monetary Fund.
  3. Juliana Dutra Araujo & Grace Bin Li & Marcos Poplawski-Ribeiro & Luis-Felipe Zanna, 2013. "Current Account Norms in Natural Resource Rich and Capital Scarce Economies," IMF Working Papers 13/80, International Monetary Fund.
  4. Dalgaard, Carl-Johan & Erickson, Lennart, 2009. "Reasonable Expectations and the First Millennium Development Goal: How Much Can Aid Achieve?," World Development, Elsevier, vol. 37(7), pages 1170-1181, July.
  5. Salifou Issoufou & Edward F. Buffie & Mouhamadou Bamba Diop & Kalidou Thiaw, 2014. "Efficient Energy Investment and Fiscal Adjustment in Senegal," IMF Working Papers 14/44, International Monetary Fund.
  6. Channing Arndt & Sam Jones & Finn Tarp, 2011. "Aid Effectiveness: Opening the Black Box," Working Paper Series UNU-WIDER Working Paper W, World Institute for Development Economic Research (UNU-WIDER).
  7. Giovanni Melina & Yi Xiong, 2013. "Natural Gas, Public Investment and Debt Sustainability in Mozambique," IMF Working Papers 13/261, International Monetary Fund.

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