Advanced Search
MyIDEAS: Login

International aid and financial crises in donor countries

Contents:

Author Info

  • Dang, Hai-Anh
  • Knack, Steve
  • Rogers, Halsey

Abstract

The global financial crisis has already led to sharp downturns in the developing world. In the past, international aid has been able to offset partially the effects of crises that began in the developing world, but because this crisis began in the wealthy countries, donors may be less willing or able to increase aid in this crisis. Not only have donor-country incomes fallen, but the cause of the drop -- the banking and financial-sector crisis -- may exacerbate the effect on aid flows because of its heavy fiscal costs. This paper estimates how donor-country banking crises have affected aid flows in the past, using panel data from 24 donor countries between 1977 and 2007. The analysis finds that banking crises in donor countries are associated with a substantial additional fall in aid flows, beyond any income-related effects, perhaps because of the high fiscal costs of crisis and the debt hangover in the post-crisis periods. In most specifications, aid flows from crisis-affected countries fall by an average of 20 to 25 percent (relative to the counterfactual) and bottom out only about a decade after the banking crisis hits. In addition, the results confirm that donor-country incomes are robustly related to per-capita aid flows, with an elasticity of about 3. Because all donor countries are being hit hard by the current global recession, and several have also suffered banking-sector crises, there are reasons to expect that aid could fall by a significant amount (again, relative to the counterfactual) in the coming years -- just when aid may be most clearly justified to help smooth exogenous shocks to developing countries.

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-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2009/12/29/000158349_20091229212514/Rendered/PDF/WPS5162.pdf
Download Restriction: no

Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5162.

as in new window
Length:
Date of creation: 01 Dec 2009
Date of revision:
Handle: RePEc:wbk:wbrwps:5162

Contact details of provider:
Postal: 1818 H Street, N.W., Washington, DC 20433
Phone: (202) 477-1234
Email:
Web page: http://www.worldbank.org/
More information through EDIRC

Related research

Keywords: Economic Conditions and Volatility; Labor Policies; Debt Markets; Development Economics&Aid Effectiveness; Banks&Banking Reform;

Other versions of this item:

Find related papers by JEL classification:

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. Beck, T.H.L. & Clarke, G. & Groff, A. & Keefer , P. & Walsh, P., 2001. "New tools in comparative political economy: The database of political institutions," Open Access publications from Tilburg University urn:nbn:nl:ui:12-3125517, Tilburg University.
  2. Giovanni S. F. Bruno, 2005. "Estimation and inference in dynamic unbalanced panel-data models with a small number of individuals," Stata Journal, StataCorp LP, vol. 5(4), pages 473-500, December.
  3. Alesina, Alberto & Dollar, David, 2000. " Who Gives Foreign Aid to Whom and Why?," Journal of Economic Growth, Springer, vol. 5(1), pages 33-63, March.
  4. Giovanni S.F. Bruno, 2004. "Approximating the Bias of the LSDV Estimator for Dynamic Unbalanced Panel Data Models," KITeS Working Papers 159, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jul 2004.
  5. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  6. Demirguc-Kunt, Asli & Detragiache, Enrica, 2005. "Cross-country empirical studies of systemic bank distress : a survey," Policy Research Working Paper Series 3719, The World Bank.
  7. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, 02.
  8. Ronald U. Mendoza & Ryan Jones & Gabriel Vergara, 2009. "Will the global financial crisis lead to lower foreign aid? A first look at United States ODA," Fordham Economics Discussion Paper Series dp2009-01, Fordham University, Department of Economics.
  9. Blundell, R. & Bond, S., 1995. "Initial Conditions and Moment Restrictions in Dynamic Panel Data Models," Economics Papers 104, Economics Group, Nuffield College, University of Oxford.
  10. Anne Boschini & Anders Olofsg�rd, 2007. "Foreign aid: An instrument for fighting communism?," Journal of Development Studies, Taylor & Francis Journals, vol. 43(4), pages 622-648.
  11. Hillman, Arye L., 2010. "Expressive behavior in economics and politics," European Journal of Political Economy, Elsevier, vol. 26(4), pages 403-418, December.
  12. Reinhart, Carmen M. & Rogoff, Kenneth S., 2013. "Banking crises: An equal opportunity menace," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4557-4573.
  13. Riccardo Faini, 2006. "Foreign aid and fiscal policy," Development Working Papers 212, Centro Studi Luca d\'Agliano, University of Milano.
  14. Michael A. Clemens & Steven Radelet & Rikhil R. Bhavnani & Samuel Bazzi, 2012. "Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth," Economic Journal, Royal Economic Society, vol. 122(561), pages 590-617, 06.
  15. Chong, Alberto & Gradstein, Mark, 2008. "What determines foreign aid? The donors' perspective," Journal of Development Economics, Elsevier, vol. 87(1), pages 1-13, August.
  16. Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises: The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
  17. Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises: A New Database," IMF Working Papers 08/224, International Monetary Fund.
  18. Dollar, David & Levin, Victoria, 2006. "The Increasing Selectivity of Foreign Aid, 1984-2003," World Development, Elsevier, vol. 34(12), pages 2034-2046, December.
  19. Steve Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  20. Round, Jeffery I. & Odedokun, Matthew, 2004. "Aid effort and its determinants," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 293-309.
  21. Markus Brückner, 2013. "On the simultaneity problem in the aid and growth debate," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(1), pages 126-150, 01.
  22. Jeffrey M. Wooldridge, 2003. "Cluster-Sample Methods in Applied Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 133-138, May.
  23. Mosley, Paul, 1985. "The Political Economy of Foreign Aid: A Model of the Market for a Public Good," Economic Development and Cultural Change, University of Chicago Press, vol. 33(2), pages 373-93, January.
  24. Joseph Young & Michael Findley, 2011. "Can peace be purchased? A sectoral-level analysis of aid’s influence on transnational terrorism," Public Choice, Springer, vol. 149(3), pages 365-381, December.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Era Dabla-Norris & Camelia Minoiu & Luis-Felipe Zanna, 2010. "Business Cycle Fluctuations, Large Shocks, and Development Aid: New Evidence," IMF Working Papers 10/240, International Monetary Fund.
  2. Isabel Ortiz & Jingqing Chai & Matthew Cummins, 2011. "Identifying Fiscal Space:Options for Social and Economic Development for Children and Poor Households in 184 Countries," Working papers 1108, UNICEF,Division of Policy and Strategy.
  3. Sara Guerschanik Calvo, 2010. "The Global Financial Crisis of 2008-10: A View from the Social Sectors," Human Development Research Papers (2009 to present) HDRP-2010-18, Human Development Report Office (HDRO), United Nations Development Programme (UNDP).
  4. Sèna Kimm Gnangnon, 2011. "The consequences of Fiscal Episodes in OECD Countries for Aid Supply," Working Papers halshs-00613161, HAL.
  5. Gravier-Rymaszewska, Joanna, 2012. "How Aid Supply Responds to Economic Crises: A Panel VAR Approach," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  6. Justin Yifu Lin & Doerte Doemeland, 2012. "Beyond Keynesianism: Global Infrastructure Investments In Times Of Crisis," Journal of International Commerce, Economics and Policy (JICEP), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 1250015-1-1.
  7. Sèna Kimm Gnangnon, 2013. "How do OECD donor countries distribute foreign aid among developing countries during their fiscal episodes?," Working Papers halshs-00786009, HAL.
  8. Das, Debasish Kumar & Dutta, Champa Bati, 2012. "Global financial crisis and foreign development assistance shocks in least developing countries," MPRA Paper 40281, University Library of Munich, Germany.
  9. Maureen Lewis & Marijn Verhoeven, 2010. "Financial Crises and Social Spending : The Impact of the 2008-2009 Crisis," World Bank Other Operational Studies 12965, The World Bank.
  10. Robert Shelburne, 2010. "The Global Financial Crisis and Its Impact on Trade: The World and the European Emerging Economies," ECE Discussion Papers Series 2010_2, UNECE.
  11. Andrea Filippo Presbitero & Alberto Zazzaro, 2010. "The Global Crisis in Low- and Middle-Income Countries: How the IMF Responded," Mo.Fi.R. Working Papers 35, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  12. Andrea Filippo Presbitero, 2013. "Aid and Vulnerability," Mo.Fi.R. Working Papers 88, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
  13. Weist, Dana & Togo, Eriko & Prasad, Abha, 2010. "Crisis preparedness and debt management in low income countries : strengthening institutions and policy frameworks," Policy Research Working Paper Series 5372, The World Bank.

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:wbk:wbrwps:5162. 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: (Roula I. Yazigi).

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.