The consequences of Fiscal Episodes in OECD Countries for Aid Supply

This paper contributes to the established literature both on the side of fiscal consolidation (for e.g. Alesina and Perotti 1995; Alesina et al. 2010) and that of aid supplies (for e.g. Mosley 1985; Faini, 2006) by investigating the effects of fiscal episodes in OECD donor countries on their aid effort vis-à-vis the developing countries. We use descriptive statistics provided by Alesina and Ardagna (2010) on episodes of fiscal consolidation and stimuli in OECD countries and regression models to perform this analysis. The study is performed on a sample of 19 OECD DAC countries as well as on sub-samples for robustness check and over the period 1970-2007. Overall, the results suggest that the episodes of fiscal consolidation and the size of these fiscal austerity policies in OECD DAC countries lead to the curtailment of aid effort. Whilst during periods of fiscal expansion, aid expenditures increase, the size of these fiscal expansion policies may have an opposite effect. The fiscal austerity measures currently adopted by OECD DAC countries are likely to result in aid shortfalls to developing countries, with these effects likely be higher in the “Like-minded Donor countries”.