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Does Aid Mitigate Shocks?

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  • Paul Collier
  • Benedikt Goderis

Abstract

This paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries. Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter. We also find that both the level of aid and the flexibillity of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchage rate flexibility are partly substitutes. We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.

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File URL: http://www.oxcarre.ox.ac.uk/images/stories/papers/ResearchPapers/oxcarrerp200806.pdf
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Bibliographic Info

Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 006.

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Date of creation: 2008
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Handle: RePEc:oxf:oxcrwp:006

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Related research

Keywords: commodity export price shocks; commodity-dependent countries; shock-prone countries; exchange rate;

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  1. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
  2. Paul Collier & Benedikt Goderis, 2007. "Commodity Prices, Growth, and the Natural Resource Curse: Reconciling a Conundrum," Economics Series Working Papers WPS/2007-15, University of Oxford, Department of Economics.
  3. Raddatz, Claudio, 2005. "Are external shocks responsible for the instability of output in low income countries?," Policy Research Working Paper Series 3680, The World Bank.
  4. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
  5. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," The Journal of Development Studies, Taylor and Francis Journals, vol. 37(6), pages 66-92.
  6. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  7. Benedikt Goderis & Vasso P. Ioannidou, 2006. "Do High Interest Rates Defend Currencies During Speculative Attacks? New Evidence," Economics Series Working Papers WPS/2006-11, University of Oxford, Department of Economics.
  8. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
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