Foreign aid: is it all consumed?
Recent studies have found evidence to suggest that aid's effectiveness on growth has improved. Yet the debate on aid and domestic savings is still inconclusive and aid fungibility continues to be particularly contentious. One of the problems with much of the earlier literature examining the relationship between aid and savings (or aid-consumption) is that the relationship is not well embedded in a convincing theoretical framework. Although recent developments in fiscal response models have been made, the methodology applied when testing the model empirically is still not convincing. In this paper we use an alternative theoretical setting and start from a 'normal income' perspective that consumption and savings are driven by life cycle|permanent income factors. Using a panel setting, the model is tested on a sample of developing countries. We found limited support for life cycle|permanent income drivers but did find that changes in the policy environment, for instance stabilisation programmes, may have been influential. The hypothesis that aid has been fungible in the pre-1980 era could not be rejected. However, for the post 1980 period, where policy reforms were common, aid inflows did not seem to have leaked to finance consumption contrary to the views of both the right and the left questioning the utility of foreign aid. Copyright © 2004 John Wiley & Sons, Ltd.
Volume (Year): 16 (2004)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www3.interscience.wiley.com/journal/5102/home|
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.:
- Franco-Rodriguez, Susana & Morrissey, Oliver & McGillivray, Mark, 1998.
"Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid,"
Elsevier, vol. 26(7), pages 1241-1250, July.
- Susana Franco-Rodriguez, & Mark McGillivray, & Oliver Morrissey, . "Aid and the Public Sector in Pakistan: Evidence with Endogenous Aid," Discussion Papers 98/2, University of Nottingham, CREDIT.
- Stephen P. Zeldes, .
"Consumption and Liquidity Constraints: An Empirical Investigation,"
Rodney L. White Center for Financial Research Working Papers
16-88, Wharton School Rodney L. White Center for Financial Research.
- Zeldes, Stephen P, 1989. "Consumption and Liquidity Constraints: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 97(2), pages 305-46, April.
- Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
- Levy, Victor, 1987. "Anticipated Development Assistance, Temporary Relief Aid, and," Economic Journal, Royal Economic Society, vol. 97(386), pages 446-58, June.
- Morisset, Jacques, 1989. "The impact of foreign capital inflows on domestic savings reexamined: The case of Argentina," World Development, Elsevier, vol. 17(11), pages 1709-1715, November.
- Hansen, Henrik & Tarp, Finn, 1999.
"Aid Effectiveness Disputed,"
62290, University Library of Munich, Germany.
- Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
- Khan, Haider Ali & Hoshino, Eiichi, 1992. "Impact of foreign aid on the fiscal behavior of LDC governments," World Development, Elsevier, vol. 20(10), pages 1481-1488, October.
- Shea, John, 1995. "Union Contracts and the Life-Cycle/Permanent-Income Hypothesis," American Economic Review, American Economic Association, vol. 85(1), pages 186-200, March.
- Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
- Heller, Peter S, 1975. "A Model of Public Fiscal Behavior in Developing Countries: Aid, Investment, and Taxation," American Economic Review, American Economic Association, vol. 65(3), pages 429-45, June.
- Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-87, December.
- Olekalns, N, 1997.
"Has Financial Deregulation revived the Permanent Income/Life Cycle Hypothesis?,"
Department of Economics - Working Papers Series
564, The University of Melbourne.
- Nilss Olekalns, 1997. "Has Financial Deregulation Revived the Permanent Income/Life Cycle Hypothesis?," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 30(2), pages 155-166.
- Susana Franco-Rodriguez, 2000. "Recent developments in fiscal response with an application to Costa Rica," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 429-441.
- Gang, Ira N. & Ali Khan, Haider, 1990. "Foreign aid, taxes, and public investment," Journal of Development Economics, Elsevier, vol. 34(1-2), pages 355-369, November.
- Griffin, Keith B & Enos, J L, 1970. "Foreign Assistance: Objectives and Consequences," Economic Development and Cultural Change, University of Chicago Press, vol. 18(3), pages 313-27, April.
- Runkle, David E., 1991. "Liquidity constraints and the permanent-income hypothesis : Evidence from panel data," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 73-98, February.
- Mosley, Paul, 1980. "Aid, Savings and Growth Revisited," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 42(2), pages 79-95, May.
- Snyder, Donald, 1990. "Foreign Aid and Domestic Savings: A Spurious Correlation?," Economic Development and Cultural Change, University of Chicago Press, vol. 39(1), pages 175-81, October.
When requesting a correction, please mention this item's handle: RePEc:wly:jintdv:v:16:y:2004:i:2:p:189-199. 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: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.