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International aid and financial crises in donor countries

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  • Dang, Hai-Anh
  • Knack, Stephen
  • Rogers, F. Halsey

Abstract

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.

Suggested Citation

  • Dang, Hai-Anh & Knack, Stephen & Rogers, F. Halsey, 2013. "International aid and financial crises in donor countries," European Journal of Political Economy, Elsevier, vol. 32(C), pages 232-250.
  • Handle: RePEc:eee:poleco:v:32:y:2013:i:c:p:232-250
    DOI: 10.1016/j.ejpoleco.2013.08.003
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    Cited by:

    1. 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.
    2. Dennis Essers & Hans J. Blommestein & Danny Cassimon & Perla Ibarlucea Flores, 2016. "Local Currency Bond Market Development in Sub-Saharan Africa: A Stock-Taking Exercise and Analysis of Key Drivers," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 52(5), pages 1167-1194, May.
    3. Heinrich, Tobias & Kobayashi, Yoshiharu & Bryant, Kristin A., 2016. "Public Opinion and Foreign Aid Cuts in Economic Crises," World Development, Elsevier, vol. 77(C), pages 66-79.
    4. Sèna Kimm Gnangnon, 2013. "How do OECD donor countries distribute foreign aid among developing countries during their fiscal episodes?," Working Papers halshs-00786009, HAL.
    5. 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).
    6. Sam Jones, 2011. "Aid Supplies Over Time Accounting for Heterogeneity, Trends, and Dynamics," WIDER Working Paper Series 004, World Institute for Development Economic Research (UNU-WIDER).
    7. 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.
    8. Asongu, Simplice A & Nwachukwu, Jacinta C., 2015. "Foreign aid instability and bundled governance dynamics in Africa," MPRA Paper 71783, University Library of Munich, Germany.
    9. 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.
    10. Simon Lightfoot & Balázs Szent-Iványi, 2014. "Reluctant Donors? The Europeanization of International Development Policies in the New Member States," Journal of Common Market Studies, Wiley Blackwell, vol. 52(6), pages 1257-1272, November.
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    12. Gnangnon, Sena Kimm, 2013. "The consequences of fiscal episodes in OECD DAC countries for aid supply," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(3), pages 302-313.
    13. Dabla-Norris, Era & Minoiu, Camelia & Zanna, Luis-Felipe, 2015. "Business Cycle Fluctuations, Large Macroeconomic Shocks, and Development Aid," World Development, Elsevier, vol. 69(C), pages 44-61.
    14. Gnangnon, Sèna Kimm, 2017. "Structural economic vulnerability, openness and bilateral development aid flows," Economic Analysis and Policy, Elsevier, vol. 53(C), pages 77-95.
    15. repec:unu:wpaper:wp2012-25 is not listed on IDEAS
    16. Jones, Sam, 2015. "Aid Supplies Over Time: Addressing Heterogeneity, Trends, and Dynamics," World Development, Elsevier, vol. 69(C), pages 31-43.
    17. Sèna Kimm Gnangnon, 2011. "The consequences of Fiscal Episodes in OECD Countries for Aid Supply," Working Papers halshs-00613161, HAL.
    18. 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.
    19. 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.
    20. Debasish Kumar Das & Champa Bati Dutta, 2013. "Global Financial Crisis And Foreign Development Assistance Shocks In Least Developing Countries," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 38(2), pages 1-41, June.
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    22. 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.
    23. Lin, Justin Yifu & Doemeland, Doerte, 2012. "Beyond Keynesianism : global infrastructure investments in times of crisis," Policy Research Working Paper Series 5940, The World Bank.

    More about this item

    Keywords

    Foreign aid; Financial crises;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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