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Is the relationship between aid and economic growth nonlinear?

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  • Kourtellos, Andros
  • Tan, Chih Ming
  • Zhang, Xiaobo

Abstract

"There have been intensive debates on the role of aid in promoting economic development in developing countries by using cross-country analyses. Cross-country regression assuming linear relationship between aid and growth and without taking into heterogeneity of countries would produce biased estimates. To correct this, in this paper we investigate the relationship between foreign aid and growth using recently developed sample splitting methods that allow us to simultaneously uncover evidence for the existence of heterogeneity and nonlinearity. We also address model uncertainty in the context of these methods. We find some evidence that aid may have heterogeneous effects on growth across two growth regimes defined by ethnolinguistic fractionalization. However, when we account for model uncertainty, we find no evidence to suggest that the relationship between aid and growth is nonlinear. In fact, our results suggest that the partial effect of aid on growth is likely to be weakly negative. In this sense, our findings suggest that aid is potentially counterproductive to growth with outcomes not meeting the expectations of donors... The methodology developed in this paper can be used to identify typologies on other outcome variables, such as those included in the Millennium Development Goals." from Authors' Abstract
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  • Kourtellos, Andros & Tan, Chih Ming & Zhang, Xiaobo, 2007. "Is the relationship between aid and economic growth nonlinear?," Journal of Macroeconomics, Elsevier, vol. 29(3), pages 515-540, September.
  • Handle: RePEc:eee:jmacro:v:29:y:2007:i:3:p:515-540
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    10. Cohen-Cole, Ethan B. & Durlauf, Steven N. & Rondina, Giacomo, 2012. "Nonlinearities in growth: From evidence to policy," Journal of Macroeconomics, Elsevier, vol. 34(1), pages 42-58.
    11. Lessmann, Christian & Markwardt, Gunther, 2009. "Aid, growth and decentralization," Dresden Discussion Paper Series in Economics 09/09, Technische Universität Dresden, Faculty of Business and Economics, Department of Economics.
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    13. Renkow, Mitch, 2010. "Impacts of IFPRI's "priorities for pro-poor public investment" global research program:," Impact assessments 31, International Food Policy Research Institute (IFPRI).
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    18. Sarantis Kalyvitis & Thanasis Stengos & Irene Vlachaki, 2012. "Are Aid Flows Excessive or Insufficient? Estimating the Growth Impact of Aid in Threshold Regressions," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(3), pages 298-315, July.
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