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Aid, Volatility and Growth,with special reference to Africa

  • Lisa Chauvet

    (DIAL - Développement, institutions et analyses de long terme - IRD)

  • Patrick Guillaumont

    (CERDI - Centre d'études et de recherches sur le developpement international - CNRS : UMR6587 - Université d'Auvergne - Clermont-Ferrand I)

In two previous papers we have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e. that aid is more effective in countries which are more vulnerable to external shocks). Recently an important debate has emerged about the possible negative effects of aid volatility itself. However, the cushioning effect of aid may involve some volatility in aid flows, hence not necessarily negative for growth. In this paper we examine to what extent the time profile of aid disbursements may contribute to an increase or a decrease of aid effectiveness in Africa. We first show that aid, even if volatile, is not clearly as pro-cyclical as often argued, and that, even if pro-cyclical, is not necessarily destabilizing. We measure aid volatility by two methods and assess pro-cyclicality of aid with respect to exports, thus departing from previous literature, which usually assess pro-cyclicality of aid with respect to national income or fiscal receipts. The stabilizing/destabilizing nature of aid is measured by the difference in the volatility of aid and the volatility of the a aid plus exports. We then evidence through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to a stabilizing effect. Finally we consider the implications of this effect for income volatility.

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Paper provided by HAL in its series Working Papers with number halshs-00557163.

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Date of creation: 18 Jan 2011
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Handle: RePEc:hal:wpaper:halshs-00557163
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  1. Rand, John & Tarp, Finn, 2001. "Business Cycles in Developing Countries: Are They Different?," MPRA Paper 62445, University Library of Munich, Germany.
  2. A. Javier Hamann & Ales Bulir, 2001. "How Volatile and Unpredictable Are Aid Flows, and What Are the Policy Implications?," IMF Working Papers 01/167, International Monetary Fund.
  3. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
  4. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, vol. 36(10), pages 2048-2066, October.
  5. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  6. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Vegh, 2004. "When it Rains, it Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Working Papers 10780, National Bureau of Economic Research, Inc.
  7. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
  8. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
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