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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)

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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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Publisher 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
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Handle: RePEc:kud:kuiedp:0504

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

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Find related papers by JEL classification:
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence
F35 - International Economics - - International Finance - - - Foreign Aid
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data

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References listed on IDEAS
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  8. Wooldridge, Jeffrey M., 1997. "On two stage least squares estimation of the average treatment effect in a random coefficient model," Economics Letters, Elsevier, vol. 56(2), pages 129-133, October. [Downloadable!] (restricted)
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  16. 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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  17. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September. [Downloadable!] (restricted)
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  21. Swamy, P A V B, 1970. "Efficient Inference in a Random Coefficient Regression Model," Econometrica, Econometric Society, vol. 38(2), pages 311-23, March. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tarp, Finn, 2006. "Aid and Development," MPRA Paper 13171, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Channing Arndt & Sam Jones & Finn Tarp, 2006. "Aid and Development: The Mozambican Case," Discussion Papers 06-13, University of Copenhagen. Department of Economics. [Downloadable!]
  3. Mehmet Eris, 2008. "Foreign aid and growth," Economics Bulletin, Economics Bulletin, vol. 15(14), pages 1-14. [Downloadable!]
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