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The Allocation of volatile aid and economic growth: Evidence and a suggestive theory

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Author Info
Kyriakos C. Neanidis () (Economics, University of Manchester)
Dimitrios Varvarigos () (Dept of Economics, Loughborough University)

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Abstract

We present evidence on the effects of aid transfers and their degree of volatility on economic growth and show that these effects can be categorised in relation to the allocation of foreign aid between productive and non-productive purposes. Using a stochastic endogenous growth model, we provide a theoretical rationalisation for our empirical evidence. Both the empirical and the theoretical analyses generate a pertinent conclusion: situations in which aid actually inhibits the recipient’s growth rate may appear if and only if aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation decisions determine whether aid hurts or promotes trend growth.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Aid_Volatility_Growth.pdf
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Publisher Info
Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_07.

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Date of creation: Mar 2007
Date of revision: Mar 2007
Handle: RePEc:lbo:lbowps:2007_07

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Related research
Keywords: Foreign aid; Growth;

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Find related papers by JEL classification:
F35 - International Economics - - International Finance - - - Foreign Aid
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
O47 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Measurement of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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References listed on IDEAS
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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. Pierre-Richard Agénor & Joshua Aizenman, 2007. "Aid Volatility and Poverty Traps," NBER Working Papers 13400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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