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Aid and Income: Another Time-Series Perspective

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  • Lof, Matthijs
  • Tarp, Finn
  • Mekasha, Tseday Jemaneh

Abstract

In a recent article, Nowak-Lehmann, Dreher, Herzer, Klasen, and Mart?nez-Zarzoso (2012) (henceforth NDHKM) conclude that foreign aid has not had a significant effect on income, based on evidence from panel data potentially covering 131 countries over the period 1960-2006. The present study provides a replication of the empirical results reported by NDHKM. We uncover that NDHKM relied on a regression model that included a log transformation of variables that are not strictly positive. This led to a non-random omission of a large proportion of observations. Furthermore, we show that NDHKM´s use of co-integrated regressions is not a suitable empirical strategy for estimating the causal effect of aid on income. Given the nature of the variables and the question under investigation, a Vector Autoregressive (VAR) model can arguably better address the inherent endogeneity problem in the aid-growth relationship. Evidence from a panel VAR model estimated on the dataset of NDHKM, suggests a positive and statistically significant long-run effect of aid on income.

Suggested Citation

  • Lof, Matthijs & Tarp, Finn & Mekasha, Tseday Jemaneh, 2013. "Aid and Income: Another Time-Series Perspective," WIDER Working Paper Series 069, World Institute for Development Economic Research (UNU-WIDER).
  • Handle: RePEc:unu:wpaper:wp2013-069
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    References listed on IDEAS

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    1. Felicitas Nowak-Lehmann & Axel Dreher & Dierk Herzer & Stephan Klasen & Inmaculada Martínez-Zarzoso, 2012. "Does foreign aid really raise per capita income? A time series perspective," Canadian Journal of Economics, Canadian Economics Association, vol. 45(1), pages 288-313, February.
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    1. repec:bla:rdevec:v:21:y:2017:i:3:p:627-663 is not listed on IDEAS
    2. Feeny, Simon & Vuong, Vu, 2017. "Explaining Aid Project and Program Success: Findings from Asian Development Bank Interventions," World Development, Elsevier, vol. 90(C), pages 329-343.
    3. Cassimon, Danny & Van Campenhout, Bjorn & Ferry, Marin & Raffinot, Marc, 2015. "Africa: Out of debt, into fiscal space? Dynamic fiscal impact of the debt relief initiatives on African Heavily Indebted Poor Countries (HIPCs)," International Economics, Elsevier, vol. 144(C), pages 29-52.
    4. Channing Arndt & Sam Jones & Finn Tarp, 2016. "What Is the Aggregate Economic Rate of Return to Foreign Aid?," World Bank Economic Review, World Bank Group, vol. 30(3), pages 446-474.
    5. Tribe, Mihcael, 2015. "International Aid to Tanzania – with some comparisons from Ghana and Uganda," SIRE Discussion Papers 2015-55, Scottish Institute for Research in Economics (SIRE).
    6. Tribe, Mihcael, 2015. "International Aid to Tanzania – with some comparisons from Ghana and Uganda," 2007 Annual Meeting, July 29-August 1, 2007, Portland, Oregon TN 2015-55, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    7. Felicitas Nowak-Lehmann D. & Elena Gross, 2015. "What effect does development aid have on productivity in recipient countries? An analysis using quantiles and thresholds," Ibero America Institute for Econ. Research (IAI) Discussion Papers 232, Ibero-America Institute for Economic Research.
    8. Lof, Matthijs & Mekasha, Tseday Jemaneh & Tarp, Finn, 2015. "Rejoinder to Herzer, Nowak-Lehmann, Dreher, Klasen, and Martinez-Zarzoso (2014)," World Development, Elsevier, vol. 70(C), pages 397-399.
    9. 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.
    10. Lof, Matthijs & Malinen, Tuomas, 2014. "Does sovereign debt weaken economic growth? A panel VAR analysis," Economics Letters, Elsevier, vol. 122(3), pages 403-407.
    11. Alessandra Pelloni & Thanasis Stengos & Ilaria Tedesco, 2018. "Aid to agriculture, trade and take-off," Working Paper series 18-04, Rimini Centre for Economic Analysis.
    12. Stefan Leiderer, 2015. "Donor Coordination for Effective Government Policies?," Journal of International Development, John Wiley & Sons, Ltd., vol. 27(8), pages 1422-1445, November.
    13. repec:bla:devpol:v:35:y:2017:i::p:o96-o117 is not listed on IDEAS
    14. Felicitas Nowak-Lehmann D. & Inmaculada Martínez-Zarzoso & Stephan Klasen, 2014. "The aid-income link revisited. How plausible and robust are the results?," Ibero America Institute for Econ. Research (IAI) Discussion Papers 230, Ibero-America Institute for Economic Research.
    15. Herzer, Dierk & Nowak-Lehmann, Felicitas & Dreher, Axel & Klasen, Stephan & Martinez-Zarzoso, Inmaculada, 2015. "Comment on Lof, Mekasha, and Tarp (2014)," World Development, Elsevier, vol. 70(C), pages 389-396.
    16. Michael Tribe, 2015. "International aid to Tanzania - with some comparisons from Ghana and Uganda," Working Papers 1503, University of Strathclyde Business School, Department of Economics.
    17. Kibriya, Shahriar & Zhang, Yu & Bessler, David & Price, Edwin, 2016. "How wealth of nations interact with aid and peace: A time and country variant analysis," 2016 Annual Meeting, July 31-August 2, 2016, Boston, Massachusetts 235859, Agricultural and Applied Economics Association.

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    Keywords

    Economic assistance and foreign aid; Econometric models (Economic development);

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