The Long-Run Effect of Foreign Aid on Domestic Output
AbstractThis 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 InfoPaper provided by Verein für Socialpolitik, Research Committee Development Economics in its series Proceedings of the German Development Economics Conference, Hannover 2010 with number 1.
Date of creation: 2010
Date of revision:
Foreign aid; Domestic output; Heterogeneous panel cointegration techniques; General-to-specific approach;
Find related papers by JEL classification:
- F35 - International Economics - - International Finance - - - Foreign Aid
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-25 (All new papers)
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