IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

The Allocation of volatile aid and economic growth: Evidence and a suggestive theory

We present evidence on the effects of aid transfers and their degree of volatility on economic growth and show that these effects can be categorised in relation to the allocation of foreign aid between productive and non-productive purposes. Using a stochastic endogenous growth model, we provide a theoretical rationalisation for our empirical evidence. Both the empirical and the theoretical analyses generate a pertinent conclusion: situations in which aid actually inhibits the recipient’s growth rate may appear if and only if aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation decisions determine whether aid hurts or promotes trend growth.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Aid_Volatility_Growth.pdf
Download Restriction: no

Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_07.

as
in new window

Length:
Date of creation: Mar 2007
Date of revision: Mar 2007
Handle: RePEc:lbo:lbowps:2007_07
Contact details of provider: Postal:
Loughborough, Leicestershire, LE11 3TU

Phone: +44 (0) 1509 222701
Fax: +44 (0) 1509 223910
Web page: http://www.lboro.ac.uk/departments/sbe/research/economics/index.html

More information through EDIRC

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.:

as in new window
  1. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
  2. Gomanee, Karuna & Girma, Sourafel & Morrissey, Oliver, 2005. "Aid and Growth in Sub-Saharan Africa: Accounting for Transmission Mechanisms," Working Paper Series RP2005/60, World Institute for Development Economic Research (UNU-WIDER).
  3. Collier, Paul & Dollar, David, 1999. "Aid allocation and poverty reduction," Policy Research Working Paper Series 2041, The World Bank.
  4. Minoiu, Camelia & Reddy, Sanjay G., 2010. "Development aid and economic growth: A positive long-run relation," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 27-39, February.
  5. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
  6. Alessandro Prati & Thierry Tressel, 2006. "What is the Most Effective Monetary Policy for Aid-Receiving Countries?," Working Papers 12, United Nations, Department of Economics and Social Affairs.
  7. Stephane Pallage & Michel Robe, 1998. "Foreign Aid and the Business Cycle," Cahiers de recherche CREFE / CREFE Working Papers 63, CREFE, Université du Québec à Montréal.
  8. David Roodman, 2007. "The Anarchy of Numbers: Aid, Development, and Cross-Country Empirics," World Bank Economic Review, World Bank Group, vol. 21(2), pages 255-277, May.
  9. Raghuram G. Rajan & Arvind Subramanian, 2008. "Aid and Growth: What Does the Cross-Country Evidence Really Show?," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 643-665, November.
  10. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  11. Robert Lensink & Oliver Morrissey, 2000. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," Journal of Development Studies, Taylor & Francis Journals, vol. 36(3), pages 31-49.
  12. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  13. Asiedu, Elizabeth & Villamil, Anne P., 2002. "Imperfect Enforcement, Foreign Investment, And Foreign Aid," Macroeconomic Dynamics, Cambridge University Press, vol. 6(04), pages 476-495, September.
  14. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  15. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  16. Chatterjee, Santanu & Sakoulis, Georgios & Turnovsky, Stephen J., 2003. "Unilateral capital transfers, public investment, and economic growth," European Economic Review, Elsevier, vol. 47(6), pages 1077-1103, December.
  17. J. Svensson, 1999. "Aid, Growth and Democracy," Economics and Politics, Wiley Blackwell, vol. 11(3), pages 275-297, November.
  18. Michael Clemens & Steven Radelet & Rikhil Bhavnani, 2004. "Counting Chickens When They Hatch: The Short-term Effect of Aid on Growth," Working Papers 44, Center for Global Development.
  19. George Mavrotas & David Fielding, 2010. "The Volatility of Aid," Working Papers id:3166, eSocialSciences.
  20. A. Javier Hamann & Ales Bulir, 2006. "Volatility of Development Aid; From the Frying Pan into the Fire?," IMF Working Papers 06/65, International Monetary Fund.
  21. Futagami, Koichi & Morita, Yuichi & Shibata, Akihisa, 1993. " Dynamic Analysis of an Endogenous Growth Model with Public Capital," Scandinavian Journal of Economics, Wiley Blackwell, vol. 95(4), pages 607-25, December.
  22. Kent P. Kimbrough, 1986. "Foreign Aid and Optimal Fiscal Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 19(1), pages 35-61, February.
  23. Pantelis Kalaitzidakis & Sarantis Kalyvitis, 2008. "On the Growth Implications of Foreign Aid for Public Investment Co-Financing," Review of Development Economics, Wiley Blackwell, vol. 12(2), pages 354-371, 05.
  24. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  25. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06.
  26. Collier, Paul & Hoeffler, Anke, 2004. "Aid, policy and growth in post-conflict societies," European Economic Review, Elsevier, vol. 48(5), pages 1125-1145, October.
  27. Chatterjee, Santanu & Turnovsky, Stephen J., 2007. "Foreign aid and economic growth: The role of flexible labor supply," Journal of Development Economics, Elsevier, vol. 84(1), pages 507-533, September.
  28. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
  29. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 4.
  30. Maurice Obstfeld., 1998. "Foreign Resource Inflows, Saving, and Growth," Center for International and Development Economics Research (CIDER) Working Papers C98-099, University of California at Berkeley.
  31. Blackburn, Keith & Galindev, Ragchaasuren, 2003. "Growth, volatility and learning," Economics Letters, Elsevier, vol. 79(3), pages 417-421, June.
  32. Radelet Steven & Sachs Jeffrey & Lee Jong-Wha, 2001. "The Determinants and Prospects of Economic Growth in Asia," International Economic Journal, Taylor & Francis Journals, vol. 15(3), pages 1-29.
  33. repec:cup:macdyn:v:6:y:2002:i:4:p:476-95 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:lbo:lbowps:2007_07. 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: (Huw Edwards)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.