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

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. The analysis shows that the main channel through which aid promotes growth is by increasing physical investment.

Bibliographic Details

Main Authors:	Galiani, Sebastian, Knack, Stephen, Xu, Lixin Colin, Zou, Ben
Language:	English en_US
Published:	World Bank, Washington, DC 2014-05
Subjects:	ABSOLUTE VALUE, AFRICAN DEVELOPMENT BANK, AGGREGATE LEVEL, AID, AID ALLOCATION, AID FLOWS, ANNUAL GROWTH, ANNUAL RATE, AVERAGE ANNUAL, AVERAGE GROWTH, AVERAGE GROWTH RATE, AVERAGE LEVEL, AVERAGE SHARE, BANKING CRISIS, BENCHMARK, BILATERAL AID, BILATERAL DONORS, CIVIL LIBERTIES, CONDITIONAL CONVERGENCE, COUNTRY CHARACTERISTICS, COUNTRY DUMMY, COUNTRY LEVEL, COUNTRY NAME, COUNTRY SPECIFIC, COUNTRY-SPECIFIC EFFECTS, CROSS COUNTRY, CROSS-SECTIONAL DATA, DATA MODEL, DEBT, DENSITY FUNCTION, DEPENDENT VARIABLE, DEVELOPED COUNTRIES, DEVELOPING COUNTRIES, DEVELOPMENT AID, DEVELOPMENT ASSISTANCE, DEVELOPMENT COOPERATION, DEVELOPMENT ECONOMICS, DEVELOPMENT INDICATORS, DEVELOPMENT ISSUES, DEVELOPMENT POLICY, DEVELOPMENT RESEARCH, DYNAMIC PANEL, DYNAMIC PANEL MODELS, ECONOMETRIC MODELS, ECONOMETRICS, ECONOMIC GROWTH, ECONOMIC REVIEW, ECONOMIC STUDIES, ECONOMICS, EMPIRICAL GROWTH MODEL, EMPIRICAL LITERATURE, EMPIRICAL MODEL, EMPIRICAL RESEARCH, EMPLOYMENT EQUATIONS, ENDOGENOUS VARIABLE, ENDOGENOUS VARIABLES, ERROR TERM, ERROR TERMS, ESTIMATED COEFFICIENT, ESTIMATED COEFFICIENTS, EXCHANGE RATES, EXOGENOUS CHANGES, EXPLANATORY VARIABLE, FIXED EFFECTS, FIXED EFFECTS ESTIMATOR, FOOD AID, FOREIGN AID, FUNCTIONAL FORM, GDP, GDP DEFLATOR, GDP PER CAPITA, GROSS DOMESTIC PRODUCT, GROWTH DETERMINANTS, GROWTH EQUATION, GROWTH LITERATURE, GROWTH MODELS, GROWTH RATE, GROWTH RATES, GROWTH REGRESSIONS, HISTORICAL DATA, HUMAN DEVELOPMENT, HUMANITARIAN AID, IDA ELIGIBILITY, INCOME DATA, INCOME DISTRIBUTION, INCOME LEVEL, INCOME LEVELS, INCOMES, INFLATION, INFLATION RATES, INTERNATIONAL DEVELOPMENT, INVENTORY, INVESTMENT RATE, LAGGED DEPENDENT, LAGGED VALUE, LAGGED VALUES, LESS DEVELOPED COUNTRIES, LONG RUN, LOW-INCOME COUNTRIES, MACROECONOMICS, MARGINAL EFFECT, MEASUREMENT ERROR, MEASUREMENT ERRORS, MONEY SUPPLY, NATIONAL ACCOUNTS, NATIONAL INCOME, NEGATIVE GROWTH, 0 HYPOTHESIS, OFFICIAL DEVELOPMENT ASSISTANCE, PER CAPITA GROWTH, PER CAPITA GROWTH RATE, PER CAPITA INCOME, POINT ESTIMATE, POINT ESTIMATES, POLICY DISCUSSIONS, POLICY RESEARCH, POLITICAL RIGHTS, POOR COUNTRIES, POSITIVE EFFECT, POSITIVE EFFECTS, POSITIVE IMPACT, POSITIVE SHOCKS, POWER PARITY, PRIMARY SCHOOL ENROLMENT, PRIVATE SECTOR, PURCHASING POWER, REAL GDP, REGRESSION SAMPLE, SENSITIVITY ANALYSIS, SERIAL CORRELATION, SIGNIFICANT DIFFERENCES, SIGNIFICANT EFFECT, SIGNIFICANT EVIDENCE, STANDARD DEVIATION, STRUCTURAL ADJUSTMENT, STRUCTURAL CHANGE, WEALTH, WORLD DEVELOPMENT INDICATORS,
Online Access:	http://documents.worldbank.org/curated/en/2014/05/19495112/effect-aid-growth-evidence-quasi-experiment https://hdl.handle.net/10986/18338
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