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Aid and growth.New evidence using an excludable instrument

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  • Dreher, Axel
  • Langlotz, Sarah

Abstract

We use an excludable instrument to test the effect of bilateral foreign aid on economic growth in a sample of 96 recipient countries over the 1974-2009 period. We interact donor government fractionalization with a recipient country’s probability of receiving aid. The results show that fractionalization increases donors’ aid budgets, representing the over-time variation of our instrument, while the probability of receiving aid introduces variation across recipient countries. Controlling for country- and period-specific effects that capture the levels of the interacted variables, the interaction provides a powerful and excludable instrument. Making use of the instrument, our results show no significant effect of aid on growth in the overall sample. We also investigate the effect of aid on consumption, savings, and investments, and split the sample according to the quality of economic policy, democracy, and the Cold War period. With the exception of the post-Cold War period (where abundant aid reduces growth), we find no significant effect of aid on growth in any of these sub-samples. None of the other outcomes are affected by aid.

Suggested Citation

  • Dreher, Axel & Langlotz, Sarah, 2017. "Aid and growth.New evidence using an excludable instrument," Working Papers 0635, University of Heidelberg, Department of Economics.
  • Handle: RePEc:awi:wpaper:0635
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    Cited by:

    1. Dutta, Nabamita & Williamson, Claudia R., 2016. "Aiding economic freedom: Exploring the role of political institutions," European Journal of Political Economy, Elsevier, vol. 45(S), pages 24-38.
    2. Paul A. Raschky & Manijeh Schwindt, 2016. "Aid, Catastrophes and the Samaritan's Dilemma," Economica, London School of Economics and Political Science, vol. 83(332), pages 624-645, October.
    3. Freytag , Andreas & Pettersson, Jonatan & Schmied, Julian, 2016. "Debt Relief and Good Governance: New Evidence," Annual Conference 2016 (Augsburg): Demographic Change 145914, Verein für Socialpolitik / German Economic Association.
    4. Bluhm, Richard & Gassebner, Martin & Langlotz, Sarah & Schaudt, Paul, 2016. "Fueling conflict? : (De)escalation and bilateral aid," MERIT Working Papers 053, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    5. Sarah Langlotz & Niklas Potrafke, 2016. "Does Development Aid Increase Military Expenditure?," CESifo Working Paper Series 6088, CESifo Group Munich.
    6. Sebastian Galiani & Stephen Knack & Lixin Colin Xu & Ben Zou, 2017. "The effect of aid on growth: evidence from a Quasi-experiment," Journal of Economic Growth, Springer, vol. 22(1), pages 1-33, March.
    7. Axel Dreher & Steffen Lohmann, 2015. "Aid and growth at the regional level," Oxford Review of Economic Policy, Oxford University Press, vol. 31(3-4), pages 420-446.
    8. repec:eee:wdevel:v:99:y:2017:i:c:p:320-334 is not listed on IDEAS
    9. Axel Dreher & Valentin F. Lang & Sebastian Ziaja, 2017. "Foreign Aid in Areas of Limited Statehood," CESifo Working Paper Series 6340, CESifo Group Munich.
    10. Kai Gehring & Katharina Michaelowa & Axel Dreher & Franziska Spörri, 2015. "Do we know what we think we know? Aid fragmentation and effectiveness revisited," Courant Research Centre: Poverty, Equity and Growth - Discussion Papers 185, Courant Research Centre PEG.
    11. Lang, Valentin, 2016. "The Economics of the Democratic Deficit: The Effect of IMF Programs on Inequality," Working Papers 0617, University of Heidelberg, Department of Economics.

    More about this item

    Keywords

    aid effectiveness; government fractionalization; economic growth;

    JEL classification:

    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations

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