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Identifying thresholds in aid effectiveness

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  • Laurent Wagner

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Abstract

In this paper, the author focuses on the nonlinear nature of the aid to growth relationship to show that the “Big Push” hypothesis is consistent with capacity constraints in the understanding of aid effectiveness. The Big Push hypothesis proposes the existence of one threshold below which aid is not effective, whereas the constraints inferred by the concept of absorptive capacity suggest the existence of a second threshold above which aid is no longer effective. This paper addresses the issue of these thresholds which characterize the aid to growth relationship. Using a semi-parametric econometric method, the author finds that aid becomes effective only above a critical level, but what is more it becomes detrimental to growth at high aid flows. The author also investigates how the quality of institutions and economic vulnerability modify the level of these two thresholds. He finds that economic vulnerability is a key factor conditioning aid effectiveness. Copyright Kiel Institute 2014

Suggested Citation

  • Laurent Wagner, 2014. "Identifying thresholds in aid effectiveness," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 150(3), pages 619-638, August.
  • Handle: RePEc:spr:weltar:v:150:y:2014:i:3:p:619-638
    DOI: 10.1007/s10290-014-0187-4
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Guillaumont, Patrick & Guillaumont Jeanneney, Sylviane & Wagner, Laurent, 2017. "How to Take into Account Vulnerability in Aid Allocation Criteria and Lack of Human Capital as Well: Improving the Performance Based Allocation," World Development, Elsevier, vol. 90(C), pages 27-40.
    2. Bandyopadhyay, Subhayu & Lahiri, Sajal & Younas, Javed, 2015. "Financing growth through foreign aid and private foreign loans: Nonlinearities and complementarities," Journal of International Money and Finance, Elsevier, vol. 56(C), pages 75-96.
    3. Thi Kim Cuong PHAM & Ngoc-Sang PHAM, 2017. "Economic growth and escaping the poverty trap: how does development aid work?," Working Papers P197, FERDI.

    More about this item

    Keywords

    Economic growth; Aid effectiveness; Threshold models; Semi-parametric regressions; F35; C14; 040;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General

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