Advanced Search
MyIDEAS: Login to save this paper or follow this series

The Long-Run Effect of Aid on Domestic Output

Contents:

Author Info

  • Dierk Herzer
  • Oliver Morrissey

Abstract

This paper makes two main contributions. First, we examine the long-run effect of foreign aid on domestic output for 59 developing countries using heterogeneous panel cointegration techniques to control for omitted variable and endogeneity bias to detect possible cross-country differences in the output effect of aid. The main result is that aid has, on average, a negative long-run effect on output, but there are large differences across countries (in about a third of cases the effect is positive). Second, we use a general-to-specific variable selection approach to systematically search for country-specific factors explaining the cross-country differences in the estimated long-run effect of aid. In contrast to previous studies, we find that aid effectiveness does not depend primarily on factors such as the quality of economic policy, the share of a country’s area that is in the tropics, the level of democracy or political stability. The results suggest that the cross-country heterogeneity in the output effect of aid can be explained mainly by cross-country differences in law and order, religious tensions and government size.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nottingham.ac.uk/credit/documents/papers/09-01.pdf
Download Restriction: no

Bibliographic Info

Paper provided by University of Nottingham, CREDIT in its series Discussion Papers with number 09/01.

as in new window
Length:
Date of creation:
Date of revision:
Handle: RePEc:not:notcre:09/01

Contact details of provider:
Postal: School of Economics University of Nottingham University Park Nottingham NG7 2RD
Phone: (44) 0115 951 5620
Fax: (0115) 951 4159
Web page: http://www.nottingham.ac.uk/economics/
More information through EDIRC

Related research

Keywords: Aid; Domestic output; Heterogeneous panel cointegration techniques; General-to-specific approach;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series, The World Bank 1777, The World Bank.
  2. Felicitas Nowak-Lehmann D. & Inmaculada Martínez-Zarzoso & Stephan Klasen & Dierk Herzer, 2008. "Aid and Trade - A Donor´s Perspective," Ibero America Institute for Econ. Research (IAI) Discussion Papers, Ibero-America Institute for Economic Research 171, Ibero-America Institute for Economic Research.
  3. Donald W. Snyder, 1996. "Foreign aid and private investment in developing economies," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 8(6), pages 735-745.
  4. Peter Pedroni, 2001. "Purchasing Power Parity Tests In Cointegrated Panels," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 83(4), pages 727-731, November.
  5. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  6. Lensink, Robert & Morrissey, Oliver, 1999. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," CDS Research Reports, University of Groningen, Centre for Development Studies (CDS) 199906, University of Groningen, Centre for Development Studies (CDS).
  7. Daron Acemoglu & Jaume Ventura, 2002. "The World Income Distribution," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(2), pages 659-694, May.
  8. Kevin Hoover & Harris Dellas, 2003. "Truth and Robustness in Cross-country Growth Regressions," Working Papers, University of California, Davis, Department of Economics 11, University of California, Davis, Department of Economics.
  9. Roland Hodler, 2007. "Rent seeking and aid effectiveness," International Tax and Public Finance, Springer, Springer, vol. 14(5), pages 525-541, October.
  10. Karuna Gomanee & Sourafel Girma & Oliver Morrissey, 2006. "Aid, Public Spending and Human Welfare: Evidence from Quantile Regressions," Working Papers id:761, eSocialSciences.
  11. Holly, Sean & Pesaran, M. Hashem & Yamagata, Takashi, 2006. "A Spatio-Temporal Model of House Prices in the US," IZA Discussion Papers 2338, Institute for the Study of Labor (IZA).
  12. Raghuram Rajan & Arvind Subramanian, 2007. "Does Aid Affect Governance?," American Economic Review, American Economic Association, American Economic Association, vol. 97(2), pages 322-327, May.
  13. Peter Pedroni, 2004. "Panel Cointegration: Asymptotic and Finite Sample Properties of Pooled Time Series Tests with an Application to the PPP Hypothesis," Department of Economics Working Papers, Department of Economics, Williams College 2004-15, Department of Economics, Williams College.
  14. Peter Pedroni, 1999. "Critical Values for Cointegration Tests in Heterogeneous Panels with Multiple Regressors," Department of Economics Working Papers, Department of Economics, Williams College 2000-02, Department of Economics, Williams College.
  15. Maurice Schiff & Yanling Wang, 2008. "North-South and South-South Trade-Related Technology Diffusion: How Important Are They in Improving TFP Growth?," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 44(1), pages 49-59.
  16. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, Elsevier, vol. 64(2), pages 547-570, April.
  17. Paul Mosley & John Hudson & Arjan Verschoor, 2004. "Aid, Poverty Reduction and the 'New Conditionality'," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(496), pages F217-F243, 06.
  18. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers, CERDI 200327, CERDI.
  19. 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, MIT Press, vol. 90(4), pages 643-665, November.
  20. Wacziarg, Romain & Welch, Karen Horn, 2003. "Trade Liberalization and Growth: New Evidence," Research Papers, Stanford University, Graduate School of Business 1826, Stanford University, Graduate School of Business.
  21. Lu, Shuang & Ram , Rati, 2001. "Foreign Aid, Government Policies, and Economic Growth: Further Evidence from Cross-Country Panel Data for 1970-1993," Economia Internazionale / International Economics, Camera di Commercio di Genova, Camera di Commercio di Genova, vol. 54(1), pages 15-29.
  22. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(6), pages 17-41.
  23. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  24. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, Elsevier, vol. 46(8), pages 1475-1500, September.
  25. Xavier X. Sala-i-Martin, 1997. "I Just Ran Four Million Regressions," NBER Working Papers 6252, National Bureau of Economic Research, Inc.
  26. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(1), pages 112-156, March.
  27. Singh, Ram D, 1985. "State Intervention, Foreign Economic Aid, Savings and Growth in LDCs: Some Recent Evidence," Kyklos, Wiley Blackwell, Wiley Blackwell, vol. 38(2), pages 216-32.
  28. Gomanee, Karuna & Girma, Sourafel & Morrissey, Oliver, 2005. "Aid and Growth in Sub-Saharan Africa: Accounting for Transmission Mechanisms," Working Paper Series, World Institute for Development Economic Research (UNU-WIDER) RP2005/60, World Institute for Development Economic Research (UNU-WIDER).
  29. Patrick GUILLAUMONT & Lisa CHAUVET, 1999. "Aid and Performance: A Reassessment," Working Papers, CERDI 199910, CERDI.
  30. Rita Almeida & Ana Margarida Fernandes, 2008. "Openness and Technological Innovations in Developing Countries: Evidence from Firm-Level Surveys," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 44(5), pages 701-727.
  31. Robert Osei & Oliver Morrissey & Tim Lloyd, 2005. "The fiscal effects of aid in Ghana," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 17(8), pages 1037-1053.
  32. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 0346, Faculty of Economics, University of Cambridge.
  33. Pesaran, M.H. & Smith, R., 1992. "Estimating Long-Run Relationships From Dynamic Heterogeneous Panels," Cambridge Working Papers in Economics, Faculty of Economics, University of Cambridge 9215, Faculty of Economics, University of Cambridge.
  34. M. Hashem Pesaran, 2006. "Estimation and Inference in Large Heterogeneous Panels with a Multifactor Error Structure," Econometrica, Econometric Society, Econometric Society, vol. 74(4), pages 967-1012, 07.
  35. Im, Kyung So & Pesaran, M. Hashem & Shin, Yongcheol, 2003. "Testing for unit roots in heterogeneous panels," Journal of Econometrics, Elsevier, Elsevier, vol. 115(1), pages 53-74, July.
  36. J. Svensson, 1999. "Aid, Growth and Democracy," Economics and Politics, Wiley Blackwell, Wiley Blackwell, vol. 11(3), pages 275-297, November.
  37. George Economides & Sarantis Kalyvitis & Apostolis Philippopoulos, 2008. "Does foreign aid distort incentives and hurt growth? Theory and evidence from 75 aid-recipient countries," Public Choice, Springer, Springer, vol. 134(3), pages 463-488, March.
  38. William Easterly & Ross Levine & David Roodman, 2004. "Aid, Policies, and Growth: Comment," American Economic Review, American Economic Association, American Economic Association, vol. 94(3), pages 774-780, June.
  39. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, Economic Studies Program, The Brookings Institution, vol. 26(1, 25th A), pages 1-118.
  40. Robert Lensink & Oliver Morrissey, 2000. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," Journal of Development Studies, Taylor & Francis Journals, Taylor & Francis Journals, vol. 36(3), pages 31-49.
  41. Saxonhouse, Gary R, 1976. "Estimated Parameters as Dependent Variables," American Economic Review, American Economic Association, American Economic Association, vol. 66(1), pages 178-83, March.
  42. Brautigam, Deborah A & Knack, Stephen, 2004. "Foreign Aid, Institutions, and Governance in Sub-Saharan Africa," Economic Development and Cultural Change, University of Chicago Press, University of Chicago Press, vol. 52(2), pages 255-85, January.
  43. Oliver Morrissey, 2006. "Aid or Trade, or Aid and Trade?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 39(1), pages 78-88, 03.
  44. Herzer, Dierk, 2008. "The long-run relationship between outward FDI and domestic output: Evidence from panel data," Economics Letters, Elsevier, Elsevier, vol. 100(1), pages 146-149, July.
  45. Peter Pedroni, 2000. "Fully Modified OLS for Heterogeneous Cointegrated Panels," Department of Economics Working Papers, Department of Economics, Williams College 2000-03, Department of Economics, Williams College.
  46. Paul Collier & David Dollar, 2004. "Development effectiveness: what have we learnt?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 114(496), pages F244-F271, 06.
  47. Paul Clist & Oliver Morrissey, 2011. "Aid and tax revenue: Signs of a positive effect since the 1980s," Journal of International Development, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 23(2), pages 165-180, March.
  48. Stephen Knack, 2001. "Aid Dependence and the Quality of Governance: Cross-Country Empirical Tests," Southern Economic Journal, Southern Economic Association, Southern Economic Association, vol. 68(2), pages 310-329, October.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:not:notcre:09/01. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Hilary Hughes).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.