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Aid, Volatility and Growth Again: When Aid Volatility Matters and When It Does Not

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  • Chauvet, Lisa
  • Guillaumont, Patrick

Abstract

In previous papers we have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e., aid is more effective in countries that are more vulnerable to external shocks). Recently an important debate has emerged about the possible negative effects of aid volatility itself. However, the cushioning effect of aid may involve some volatility in aid flows, which then is not necessarily negative for growth. In this paper we examine to what extent the time profile of aid disbursements may contribute to an increase or a decrease of aid effectiveness. We first show that aid, even if volatile, is not clearly as procyclical as often argued, and, even if procyclical, is not necessarily destabilizing. We measure aid volatility by several methods and assess procyclicality of aid with respect to exports, thus departing from previous literature, which usually assesses procyclicality of aid with respect to national income or fiscal receipts. The stabilizing/destabilizing nature of aid is measured by the difference in the volatility of exports and the volatility of the aid plus exports flows. Then, in order to take into account the diversity of shocks to which aid can respond, we consider the effect of aid on income volatility and again find that aid is making growth more stable, while its volatility reduces this effect. Finally, we find evidence through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to its stabilizing effect.

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File URL: http://www.wider.unu.edu/stc/repec/pdfs/rp2008/rp2008-78.pdf
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Bibliographic Info

Paper provided by World Institute for Development Economic Research (UNU-WIDER) in its series Working Paper Series with number RP2008/78.

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Length: 16 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:unu:wpaper:rp2008-78

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Keywords: aid; shocks; stability; growth;

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References

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  1. McGillivray, Mark, 2003. "Aid Effectiveness and Selectivity: Integrating Multiple Objectives into Aid Allocations," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  2. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
  3. Jean-Louis COMBES & Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY & Pascale COMBES MOTEL, 1999. "Ouverture sur l'extérieur et instabilité des taux de croissance," Working Papers 199927, CERDI.
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  7. Pallage, Stephane & Robe, Michel A, 2001. "Foreign Aid and the Business Cycle," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 641-72, November.
  8. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
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Citations

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Cited by:
  1. Laurent WAGNER & Rohen DE JUNET D'AIGLEPIERRE, 2010. "Aid and Universal Primary Education," Working Papers 201022, CERDI.
  2. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY, 2009. "Accounting for Vulnerability of African Countries in Performance Based Aid Allocation," Working Papers P08, FERDI.
  3. Yousuf, Ahmed Sadek, 2012. "Assessing Impact of Health Oriented Aid on Infant Mortality Rates," MPRA Paper 43212, University Library of Munich, Germany, revised 10 Dec 2012.
  4. Patrick GUILLAUMONT & Sylviane GUILLAUMONT JEANNENEY, 2009. "Accounting for Vulnerability of African Countries in Performance Based Aid Allocation," Working Papers P08, FERDI.
  5. Kumar, Ronald/R, 2011. "Role of Trade, Aid, Remittances and Financial Development in Pakistan," MPRA Paper 38871, University Library of Munich, Germany.
  6. Patrick GUILLAUMONT & Laurent WAGNER, 2014. "Aid effectiveness for poverty reduction: lessons from cross-country analyses, with a special focus on vulnerable countries," Working Papers P96, FERDI.
  7. Sampawende Jules TAPSOBA & Sylviane GUILLAUMONT JEANNENEY, 2009. "Pro cyclicité de la politique budgétaire et surveillance multilatérale dans les unions monétaires africaines," Working Papers 200904, CERDI.
  8. Yousuf, Ahmed Sadek, 2012. "Impact of Health Aid on Infant Mortality Rate," MPRA Paper 42945, University Library of Munich, Germany, revised 12 Oct 2012.
  9. Ahmed, Junaid & Martinez-Zarzoso, Inmaculada, 2013. "Blessing or curse: The stabilizing role of remittances, foreign aid and FDI to Pakistan," Center for European, Governance and Economic Development Research Discussion Papers 153, University of Goettingen, Department of Economics.
  10. Patrick GUILLAUMONT & Maëlan LE GOFF, 2010. "Aid and remittances: their stabilizing impact compared," Working Papers P12, FERDI.
  11. Patrick GUILLAUMONT & Maëlan LE GOFF, 2010. "Aid and remittances: their stabilizing impact compared," Working Papers P12, FERDI.
  12. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Post-Print hal-00331902, HAL.
  13. Irene Yackovlev & Victor Duarte Lledo & Lucie Gadenne, 2009. "Cyclical Patterns of Government Expenditures in Sub-Saharan Africa," IMF Working Papers 09/274, International Monetary Fund.
  14. Aurore Gary & Mathilde Maurel, 2013. "The effect of donors' policy coherence on growth," Documents de travail du Centre d'Economie de la Sorbonne 13046, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  15. Thierry Kangoye, 2008. "Instability from trade and democracy: the long-run effect of aid," Economics Bulletin, AccessEcon, vol. 6(41), pages 1-16.
  16. Guillaumont, Patrick, 2008. "An Economic Vulnerability Index: Its Design and Use for International Development Policy," Working Paper Series RP2008/99, World Institute for Development Economic Research (UNU-WIDER).
  17. Kathavate, Jay, 2013. "Direct & Indirect Effects of Aid Volatility on Growth: Do Stronger Institutions Play a Role?," MPRA Paper 45187, University Library of Munich, Germany.

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