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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.

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File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/Aid_Volatility_Growth.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_07.

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Date of creation: Mar 2007
Date of revision: Mar 2007
Handle: RePEc:lbo:lbowps:2007_07
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  33. Blackburn, Keith & Galindev, Ragchaasuren, 2003. "Growth, volatility and learning," Economics Letters, Elsevier, vol. 79(3), pages 417-421, June.
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