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Aid Eff ectiveness: New Instrument, New Results?

Author

Listed:
  • Frot, Emmanuel

    () (Stockholm Institute of Transition Economics)

  • Perrotta, Maria

    () (Stockholm Institute of Transition Economics)

Abstract

Despite a voluminous literature on the topic, the question of whether foreign aid leads to growth is still controversial. To observe the pure effect of aid, researchers used instruments that must be exogenous to growth and explain well aid flows. This paper argues that instruments used in the past do not satisfy these conditions. We propose a new instrument based on predicted aid quantity and argue that it is a significant improvement relative to past approaches. We find a significant and relatively big effect of aid: a one standard deviation increase in received aid is associated with a 1.6 percentage points higher growth rate.

Suggested Citation

  • Frot, Emmanuel & Perrotta, Maria, 2009. "Aid Eff ectiveness: New Instrument, New Results?," SITE Working Paper Series 11, Stockholm School of Economics, Stockholm Institute of Transition Economics.
  • Handle: RePEc:hhs:hasite:0011
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    Cited by:

    1. Olofsgård, Anders & Perrotta, Maria & Frot, Emmanuel, 2012. "Aid Motivation in Early and Mature Partnerships: Is there a difference?," SITE Working Paper Series 17, Stockholm School of Economics, Stockholm Institute of Transition Economics.
    2. Yenner Altunbas & John Thornton & Chrysovalantis Vasilakis, 2015. "More foreign aid, less financial development," Working Papers 15007, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    3. Stephen Knack, 2014. "Building or Bypassing Recipient Country Systems: Are Donors Defying the Paris Declaration?," Journal of Development Studies, Taylor & Francis Journals, vol. 50(6), pages 839-854, June.
    4. Dang, Hai-Anh & Knack, Stephen & Rogers, F. Halsey, 2013. "International aid and financial crises in donor countries," European Journal of Political Economy, Elsevier, vol. 32(C), pages 232-250.
    5. Knack, Stephen, 2012. "When do donors trust recipient country systems ?," Policy Research Working Paper Series 6019, The World Bank.
    6. Frot, Emmanuel & Olofsgård, Anders & Berlin, Maria Perrotta, 2014. "Aid Effectiveness in Times of Political Change: Lessons from the Post-Communist Transition," World Development, Elsevier, vol. 56(C), pages 127-138.
    7. Arndt, Channing & Jones, Sam & Tarp, Finn, 2015. "Assessing Foreign Aid’s Long-Run Contribution to Growth and Development," World Development, Elsevier, vol. 69(C), pages 6-18.
    8. Askarov, Zohid & Doucouliagos, Hristos, 2015. "Aid and institutions in transition economies," European Journal of Political Economy, Elsevier, vol. 38(C), pages 55-70.
    9. Askarov, Zohid & Doucouliagos, Hristos, 2014. "Aid and institutions in transition economies," Economics Series eco_2014_8, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.

    More about this item

    Keywords

    Foreign aid; growth; instrumental variables; GMM;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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