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The Effect of Aid on Growth: Evidence from a Quasi-Experiment

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  • Sebastian Galiani
  • Stephen Knack
  • Lixin Colin Xu
  • Ben Zou

Abstract

The literature on aid and growth has not found a convincing instrumental variable to identify the causal effects of aid. This paper exploits an instrumental variable based on the fact that since 1987, eligibility for aid from the International Development Association (IDA) has been based partly on whether or not a country is below a certain threshold of per capita income. The paper finds evidence that other donors tend to reinforce rather than compensate for reductions in IDA aid following threshold crossings. Overall, aid as a share of gross national income (GNI) drops about 59 percent on average after countries cross the threshold. Focusing on the 35 countries that have crossed the income threshold from below between 1987 and 2010, a positive, statistically significant, and economically sizable effect of aid on growth is found. A one percentage point increase in the aid to GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points.

Suggested Citation

  • Sebastian Galiani & Stephen Knack & Lixin Colin Xu & Ben Zou, 2016. "The Effect of Aid on Growth: Evidence from a Quasi-Experiment," NBER Working Papers 22164, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22164
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    Cited by:

    1. Langlotz, Sarah & Dreher, Axel, 2015. "Aid and growth. New evidence using an excludable instrument," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112878, Verein für Socialpolitik / German Economic Association.
    2. Temple, Jonathan & Van de Sijpe, Nicolas, 2017. "Foreign aid and domestic absorption," Journal of International Economics, Elsevier, vol. 108(C), pages 431-443.
    3. repec:bla:rdevec:v:21:y:2017:i:3:p:627-663 is not listed on IDEAS
    4. Michael Mitchell Omoruyi Ehizuelen & Meibo Huang, 2016. "Fostering Economic Development: Is External Finance Responsible for the Poor Economic Growth in Sub-Saharan Africa?," Global Economy Journal, De Gruyter, vol. 16(2), pages 313-347, June.
    5. Mario Holzner & Monika Schwarzhappel, 2018. "Infrastructure Investment in the Western Balkans: A First Analysis," wiiw Research Reports 432, The Vienna Institute for International Economic Studies, wiiw.
    6. repec:eee:jimfin:v:77:y:2017:i:c:p:216-232 is not listed on IDEAS
    7. Bal Gündüz, Yasemin, 2016. "The Economic Impact of Short-term IMF Engagement in Low-Income Countries," World Development, Elsevier, vol. 87(C), pages 30-49.
    8. Juergen Bitzer & Erkan Goeren, 2018. "Foreign Aid and Subnational Development: A Grid Cell Analysis," Working Papers V-407-18, University of Oldenburg, Department of Economics, revised Mar 2018.
    9. Dreher, Axel & Fuchs, Andreas & Langlotz, Sarah, 2018. "The Effects of Foreign Aid on Refugee Flows," GLO Discussion Paper Series 195, Global Labor Organization (GLO).
    10. Ozan Hatipoglu & Alp Eren Akyuz, 2018. "Donor-oriented foreign aid, trade and growth," Working Papers 2018/01, Bogazici University, Department of Economics.
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    12. Łukasz Marć, 2017. "The Impact of Aid on Total Government Expenditures: New Evidence on Fungibility," Review of Development Economics, Wiley Blackwell, vol. 21(3), pages 627-663, August.
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    17. Nimonka Bayale & Kodjo Evlo & Fousseini Traore, 2018. "Foreign aid shocks and macroeconomic adjustment mechanisms in WAEMU countries : an approach based on a computable general equilibrium model (CGE)
      [Baisse de l’aide internationale et mécanismes d'aj
      ," Working Papers hal-01865614, HAL.
    18. L. Chauvet & H. Ehrhart, 2015. "Aid and Growth. Evidence from Firm-Level Data," Working papers 563, Banque de France.
    19. Juliana Yael Milovich, 2017. "The long-term impact of U.S. aid on poverty alleviation: the role of a seat in the Security Council of the United Nations," EconomiX Working Papers 2017-47, University of Paris Nanterre, EconomiX.

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    JEL classification:

    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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