Aid, shocks, and growth
Analysis of the relationship between aid and growth by Burnside and Dollar found that the better a country's policies, the more effective aid is in raising growth in that country. But this result has been criticized for being sensitive to choice of sample and for neglecting shocks. The authors incorporate export price shocks into the analysis of aid's effect on growth. They construct export price indices using the approach pioneered by Deaton and Miller. They locate shocks by differencing the indices, removing predictable elements from the stationary process, and normalizing the residuals. Extreme negative shocks are the bottom 2.5 percent tail of this distribution. Introducing these extremeshocks into the Burnside-Dollar regression, the authors find that they are highly significant: unsurprisingly, extreme negative shocks reduce growth. Once these shocks are included, the Burnside-Dollar results become robust to choice of sample. Moreover, the adverse effects of negative shocks on growth can be mitigated through offsetting increases in aid. Indeed, targeting aid to countries experiencing negative shocks appears to be even more important for aid effectiveness than targeting aid to countries with good policies. But the authors show that, overall, donors have not used aid for this purpose.
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- Deaton, A. & Laroque, G., 1989.
"On The Behavior Of Commodity Prices,"
145, Princeton, Woodrow Wilson School - Public and International Affairs.
- Deaton, Angus & Miller, Ron, 1996.
"International Commodity Prices, Macroeconomic Performance and Politics in Sub-Saharan Africa,"
Journal of African Economies,
Centre for the Study of African Economies (CSAE), vol. 5(3), pages 99-191, October.
- Deaton, A-S & Miller, R-I, 1995. "International Commodity Prices, Macroeconomic Performance, and Politics in Sub-Saharan Africa," Princeton Studies in International Economics 79, International Economics Section, Departement of Economics Princeton University,.
- Alberto Alesina & David Dollar, 1998.
"Who Gives Foreign Aid to Whom and Why?,"
NBER Working Papers
6612, National Bureau of Economic Research, Inc.
- Dehn, Jan, 2000. "Commodity price uncertainty in developing countries," Policy Research Working Paper Series 2426, The World Bank.
- Patrick GUILLAUMONT & Lisa CHAUVET, 1999.
"Aid and Performance: A Reassessment,"
- Hansen, Henrik & Tarp, Finn, 2000.
"Aid and Growth Regressions,"
62288, University Library of Munich, Germany.
- Jan Dehn, 2000. "Commodity price uncertainty in developing countries," CSAE Working Paper Series 2000-12, Centre for the Study of African Economies, University of Oxford.
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