International aid and financial crises in donor countries
The recent global financial crisis placed new economic and fiscal pressures on donor countries that may have long-term effects on their ability and willingness to provide aid. Not only did donor-country incomes fall, but the cause of the drop — the banking and financial-sector crisis — may exacerbate the long-term effect on aid flows. 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 2010. We find that banking crises in donor countries are associated with a substantial additional fall in aid flows, beyond any income-related effects, at least in part because of the high fiscal costs of crisis and the debt hangover in the post-crisis periods. Aid flows from crisis-affected countries are estimated to fall by 28% or more (relative to the counterfactual) and to bottom out only about a decade after the banking crisis hits. In addition, our results confirm that donor-country incomes are robustly related to per-capita aid flows, with an elasticity of about 3. Findings are robust to estimation using either static or dynamic panel data methods to account for possible biases. Because many donor countries, which together provide two-thirds of aid, were hit hard by the global recession, this historical evidence indicates that aggregate aid could fall by a significant amount (again, relative to counterfactual) in the coming years. We also explore how crises affect different types of aid, such as social-sector and humanitarian aid, as well as whether strategic interaction among donors is likely to deepen or mitigate the fall in aid.
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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
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.:
- 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.
- Asli DemirgÃ¼Ã§-Kunt & Enrica Detragiache, 2005.
"Cross-Country Empirical Studies of Systemic Bank Distress: A Survey,"
National Institute Economic Review,
National Institute of Economic and Social Research, vol. 192(1), pages 68-83, April.
- Asli DemirgÃ¼Ã§-Kunt & Enrica Detragiache, 2005. "Cross-Country Empirical Studies of Systemic Bank Distress; A Survey," IMF Working Papers 05/96, International Monetary Fund.
- 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.
- Anne Boschini & Anders Olofsgård, 2007. "Foreign aid: An instrument for fighting communism?," Journal of Development Studies, Taylor & Francis Journals, vol. 43(4), pages 622-648.
- 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.
- Reinhart, Carmen M. & Rogoff, Kenneth S., 2013.
"Banking crises: An equal opportunity menace,"
Journal of Banking & Finance,
Elsevier, vol. 37(11), pages 4557-4573.
- Reinhart, Carmen M. & Rogoff, Kenneth, 2009. "Banking Crises: An Equal Opportunity Menace," CEPR Discussion Papers 7131, C.E.P.R. Discussion Papers.
- Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "Banking Crises: An Equal Opportunity Menace," NBER Working Papers 14587, National Bureau of Economic Research, Inc.
- Blundell, R. & Bond, S., 1995.
"Initial Conditions and Moment Restrictions in Dynamic Panel Data Models,"
104, Economics Group, Nuffield College, University of Oxford.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, vol. 87(1), pages 115-143, August.
- R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
- Luc Laeven & Fabian Valencia, 2010. "Resolution of Banking Crises; The Good, the Bad, and the Ugly," IMF Working Papers 10/146, International Monetary Fund.
- Hillman, Arye L., 2010. "Expressive behavior in economics and politics," European Journal of Political Economy, Elsevier, vol. 26(4), pages 403-418, December.
- Round, Jeffery I. & Odedokun, Matthew, 2004. "Aid effort and its determinants," International Review of Economics & Finance, Elsevier, vol. 13(3), pages 293-309.
- Alberto Alesina & David Dollar, 1998.
"Who Gives Foreign Aid to Whom and Why?,"
NBER Working Papers
6612, National Bureau of Economic Research, Inc.
- 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.
- Fabian Valencia & Luc Laeven, 2008. "Systemic Banking Crises; A New Database," IMF Working Papers 08/224, International Monetary Fund.
- Dollar, David & Levin, Victoria, 2006. "The Increasing Selectivity of Foreign Aid, 1984-2003," World Development, Elsevier, vol. 34(12), pages 2034-2046, December.
- 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.
- Jeffrey M. Wooldridge, 2003. "Cluster-Sample Methods in Applied Econometrics," American Economic Review, American Economic Association, vol. 93(2), pages 133-138, May.
- Giovanni S.F. Bruno, 2005.
"Estimation and inference in dynamic unbalanced panel data models with a small number of individuals,"
KITeS Working Papers
165, KITeS, Centre for Knowledge, Internationalization and Technology Studies, Universita' Bocconi, Milano, Italy, revised Jun 2005.
- 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.
- Frot, Emmanuel & Perrotta, Maria, 2009. "Aid Eff ectiveness: New Instrument, New Results?," SITE Working Paper Series 11, Stockholm Institute of Transition Economics, Stockholm School of Economics.
- Bruno, Giovanni S.F., 2005.
"Approximating the bias of the LSDV estimator for dynamic unbalanced panel data models,"
Elsevier, vol. 87(3), pages 361-366, June.
- 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.
- Faini, Riccardo, 2006.
"Foreign Aid and Fiscal Policy,"
CEPR Discussion Papers
5721, C.E.P.R. Discussion Papers.
- Markus Bruckner, 2011.
"On the Simultaneity Problem in the Aid and Growth Debate,"
School of Economics Working Papers
2011-01, University of Adelaide, School of Economics.
- 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.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Martens,Bertin & Mummert,Uwe & Murrell,Peter & Seabright,Paul, 2008.
"The Institutional Economics of Foreign Aid,"
Cambridge University Press, number 9780521055390, June.
- Chong, Alberto & Gradstein, Mark, 2008. "What determines foreign aid? The donors' perspective," Journal of Development Economics, Elsevier, vol. 87(1), pages 1-13, August.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:eee:poleco:v:32:y:2013:i:c:p:232-250. 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: (Zhang, Lei)
If references are entirely missing, you can add them using this form.