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The Short-Run Macroeconomic Impact of Foreign Aid to Small States: An Agnostic Timeseries Analysis

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Author Info
Hansen, Henrik
Headey, Derek

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Abstract

This study econometrically evaluates the short-run impact of aid in small developing countries (SDCs) by applying a VAR model to study aid's impact on 'absorption' (increasing import demand) and 'spending' (increased domestic demand) across countries. Whilst our approach allows parameters to vary across countries, the focus is on average country effects and differential effects within certain subgroups of countries. In particular, we find substantial differences between 'aid-dependent' SDCs and other SDCs which are more dependent on mineral resources and financial services. In the latter group, aid seems to be neither absorbed nor spent in any systematic fashion. But in the aid-dependent SDCs, aid receipts seem to be used more in the textbook 'absorb and spend' fashion.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2007/rp2007-38.pdf
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Publisher Info
Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Papers with number UNU-WIDER Research Paper RP2007/38.

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Length: 24 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:unu:wpaper:rp2007-38

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Related research
Keywords: foreign aid; small developing countries; macroeconomic adjustment; absorption; spending; VAR models; panel data;

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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.:
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  3. Ngeleza, Guyslain K. & Muhammad, Andrew, 2009. "Preferential trade agreements between the monetary community of Central Africa and the European Union: Stumbling or building blocks? A general equilibrium approach," IFPRI discussion papers 859, International Food Policy Research Institute (IFPRI). [Downloadable!]
  4. Easterly, William & Levine, Ross, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1203-50, November.
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  5. Streeten, Paul, 1993. "The special problems of small countries," World Development, Elsevier, vol. 21(2), pages 197-202, February. [Downloadable!] (restricted)
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  10. Easterly, William & Kraay, Aart, 2000. "Small States, Small Problems? Income, Growth, and Volatility in Small States," World Development, Elsevier, vol. 28(11), pages 2013-2027, November. [Downloadable!] (restricted)
  11. Read, Robert, 2001. "Growth, Economic Development and Structural Transition in Small Vulnerable States," Working Papers UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
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  14. Pallage, Stephane & Robe, Michel A, 2001. "Foreign Aid and the Business Cycle," Review of International Economics, Blackwell Publishing, vol. 9(4), pages 641-72, November. [Downloadable!] (restricted)
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  15. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
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  16. Gallup, J.L. & Sachs, J.D. & Mullinger, A., 1999. "Geography and Economic Development," Papers 1, Chicago - Graduate School of Business.
  17. Hausmann, Ricardo & Rodrik, Dani, 2003. "Economic development as self-discovery," Journal of Development Economics, Elsevier, vol. 72(2), pages 603-633, December. [Downloadable!] (restricted)
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  18. Harvey W. Armstrong & Robert Read, 2002. "The phantom of liberty?: economic growth and the vulnerability of small states," Journal of International Development, John Wiley & Sons, Ltd., vol. 14(4), pages 435-458. [Downloadable!]
  19. Magalhaes, Eduardo & Diao, Xinshen, 2009. "Productivity convergence in Brazil: The case of grain production," IFPRI discussion papers 857, International Food Policy Research Institute (IFPRI). [Downloadable!]
  20. Rodrik, Dani, 2005. "Growth Strategies," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 14, pages 967-1014 Elsevier. [Downloadable!] (restricted)
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  21. Petracco, Carly K. & Pender, John, 2009. "Evaluating the impact of land tenure and titling on access to credit in Uganda:," IFPRI discussion papers 853, International Food Policy Research Institute (IFPRI). [Downloadable!]
  22. Sanjeev Gupta & Peter S. Heller, 2002. "Challenges in Expanding Development Assistance," IMF Policy Discussion Papers 02/5, International Monetary Fund.
  23. Asenso-Okyere, Kwadwo & Asante, Felix A. & Tarekegn, Jifar & Andam, Kwaw S., 2009. "The linkages between agriculture and malaria: Issues for policy, research, and capacity strengthening," IFPRI discussion papers 861, International Food Policy Research Institute (IFPRI). [Downloadable!]
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. Rao, B. Bhaskara & Sharma, Kanhaiya Lal & Singh, Rup, 2007. "Estimating aid-growth equations: the case of Pacific Island countries," MPRA Paper 4554, University Library of Munich, Germany, revised 09 Sep 2007. [Downloadable!]
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