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The Long-Run Effect of Foreign Aid on Domestic Output

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  • Herzer, Dierk
  • Morrissey, Oliver

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 and 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. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Hannover 2010 with number 1.

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Date of creation: 2010
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Handle: RePEc:zbw:gdec10:1

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

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Cited by:
  1. Giscard Assoumou Ella, 2013. "Impact of international income, prices and monetary shocks on real exchange rate in eight African economies: An empirical study," The Empirical Econometrics and Quantitative Economics Letters, Faculty of Economics, Chiang Mai University, vol. 2(3), pages 41 - 54, September.

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