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Economic Growth and the Volatility of Foreign Aid

Author

Listed:
  • Michal Chervin

    (University of Amsterdam)

  • Sweder van Wijnbergen

    (University of Amsterdam)

Abstract

Foreign aid’s effectiveness in promoting economic growth remains mired in controversy.We examine the impact of the volatility of aid on economic growth, controlling for the level of aid. A four-year panel analysis is conducted encompassing 155 countries over the period 1966-2001. We find that once the volatility of aid is controlled for, aid has a positive impact on economic growth. Correspondingly, volatility of aid flows is found to be negatively related to growth. We found no significant link between investment and foreign aid, but a positive correlation between aid and consumption and a negative link between aid volatility and consumption. But our results also indicate that aid has become a source of volatility rather than insuring against it, and in that way may have become inimical to economic growth.

Suggested Citation

  • Michal Chervin & Sweder van Wijnbergen, 2010. "Economic Growth and the Volatility of Foreign Aid," Tinbergen Institute Discussion Papers 10-002/2, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20100002
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    References listed on IDEAS

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    Cited by:

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    3. Yakama Manty Jones, 2013. "Testing the Foreign Aid-led Growth Hypothesis in West Africa," Management Working Papers 3, Birkbeck Department of Management, revised Apr 2013.
    4. Sambit Bhattacharyya & Maurizio Intartaglia, 2021. "Foreign aid network diversification and its impact on growth, growth acceleration, and growth spell," Review of Development Economics, Wiley Blackwell, vol. 25(3), pages 1216-1242, August.
    5. Santos Bila & Mduduzi Biyase & Matias Farahane & Thomas Udimal, 2023. "Foreign Aid And Economic Growth In Sub-Saharan African Countries," Economics Working Papers edwrg-03-2023, College of Business and Economics, University of Johannesburg, South Africa, revised 2023.
    6. Kathavate, Jay, 2013. "Direct & Indirect Effects of Aid Volatility on Growth: Do Stronger Institutions Play a Role?," MPRA Paper 45187, University Library of Munich, Germany.
    7. Edem Kwame Mensah Klobodu & Samuel Adams, 2016. "Capital Flows and Economic Growth in Ghana," Journal of African Business, Taylor & Francis Journals, vol. 17(3), pages 291-307, September.
    8. Pierre-Richard Agénor & Nihal Bayraktar, 2020. "Aid Volatility, Human Capital, and Growth," Journal of Human Capital, University of Chicago Press, vol. 14(3), pages 401-448.

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    More about this item

    Keywords

    foreign aid; volatility; economic growth;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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