What Are the Links between Aid Volatility and Growth?

This paper adds to aid volatility literature in three ways: First it tests the validity of the aid volatility and growth relationship from various aspects: across different time horizons, by sources of aid, and by aid volatility interactions with country characteristics. Second, it investigates the relationship by the level of aid absorption and spending. Third, when examining the relationship between International Development Association aid volatility and growth, it isolates International Development Association aid volatility due to the recipient country's performance from that due to other sources. The findings suggest that, in the long run, on average, aid volatility is negatively correlated with real economic growth. But the relationship is not even. It is stronger for Sub-Saharan African countries than for other regions and it is not present in middle-income countries or countries with strong institutions. For economies where aid is fully absorbed, aid volatility matters for long-run growth; economies with full aid spending also bear a negative impact of aid volatility on long-run growth. Where aid is not fully absorbed, or where it is not fully spent, the aid volatility relationship is not significant. Looking at International Development Association aid separately, the volatility arising from the recipient country's International Development Association performance does not have a causal relationship with growth. In policy terms, the results suggest that low- income countries with weak institutions, especially in Sub-Saharan Africa, could benefit from reduced aid volatility or from being better prepared for the volatility that is there.

Bibliographic Details

Main Authors:	Markandya, Anil, Ponczek, Vladimir, Yi, Soonhwa
Language:	English en_US
Published:	World Bank, Washington, DC 2010-02
Subjects:	AGGREGATE DEMAND, AID, AID DEPENDENCY, AID FLOWS, AMERICAN ECONOMIC REVIEW, ANNUAL % CHANGE, AVERAGE GROWTH, AVERAGE GROWTH RATE, BILATERAL AID, BUSINESS CYCLE, BUSINESS CYCLES, CAPITA GROWTH, CAPITAL ACCUMULATION, CAPITAL FLOWS, CAPITAL INFLOWS, CAPITALIST PROCESS, CENTRAL BANK, COUNTRY CHARACTERISTICS, COUNTRY LEVEL, COUNTRY REGRESSIONS, COUNTRY RISK, DATA AVAILABILITY, DEVELOPING COUNTRIES, DEVELOPMENT AID, DEVELOPMENT ECONOMICS, DEVELOPMENT FINANCE, DEVELOPMENT ISSUES, DISEASE, DOMESTIC RESOURCES, ECONOMIC ACTIVITY, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC REFORM, ECONOMICS LETTERS, ERROR TERMS, EXCHANGE RATE POLICY, EXOGENOUS VOLATILITY, EXPLANATORY VARIABLES, EXPORT SECTOR, EXPORTS, EXTERNAL SHOCKS, FEDERAL RESERVE, FEDERAL RESERVE BANK, FISCAL DEFICIT, FISCAL POLICY, FIXED ASSETS, FLUCTUATIONS, FOREIGN DIRECT INVESTMENT, FOREIGN EXCHANGE, GOVERNMENT BUDGETS, GOVERNMENT CONSUMPTION, GROWTH LITERATURE, GROWTH REGRESSIONS, GROWTH RELATIONSHIP, GROWTH STANDARD DEVIATION, GROWTH VOLATILITY, HUMAN DEVELOPMENT, HUMAN DEVELOPMENT REPORT, IMPORTS, INCOME, INCREASE IN VOLATILITY, INFLATION, INFLATION RATE, INSTITUTIONAL DEVELOPMENT, INSTRUMENTAL VARIABLES, INTERACTION EFFECTS, INTERNATIONAL COUNTRY RISK GUIDE, INTERNATIONAL DEVELOPMENT, LEVEL OF INCOME, LIBERALIZATION, LIFE EXPECTANCY, LONG RUN, LONG-RUN GROWTH, LONG-RUN IMPACT, LOW INCOME, LOW INCOME COUNTRIES, LOW- INCOME COUNTRIES, LOW-INCOME COUNTRIES, MACROECONOMIC CONDITIONS, MACROECONOMIC MANAGEMENT, MACROECONOMIC POLICIES, MACROECONOMIC POLICY, MACROECONOMIC SHOCKS, MACROECONOMICS, MEDIUM TERM, MIDDLE INCOME, MIDDLE INCOME COUNTRIES, MIDDLE-INCOME COUNTRIES, MONETARY ECONOMICS, MONETARY POLICY, MONOTONIC EFFECTS, NATURAL DISASTERS, NEGATIVE IMPACT, NET CHANGES, OUTPUT, PER CAPITA GROWTH, POLICY IMPLICATIONS, POLICY RESEARCH, POLICY UNCERTAINTY, POLITICAL INSTABILITY, POOR COUNTRIES, PORTFOLIO, POVERTY TRAPS, PRIVATE INVESTMENT, REAL EXCHANGE RATE, REGRESSION ANALYSIS, REGRESSION MODEL, SAVINGS, STANDARD DEVIATION, STANDARD ERRORS, TAX, TRADABLE SECTORS, TRADE LIBERALIZATION, TRADE POLICY, VOLATILITY, VOLATILITY COEFFICIENT, VOLATILITY LITERATURE, VOLATILITY MEASURE, VOLATILITY-GROWTH,
Online Access:	http://documents.worldbank.org/curated/en/2010/02/11745307/links-between-aid-volatility-growth https://hdl.handle.net/10986/19914
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