Journal
REVIEW OF WORLD ECONOMICS
Volume 149, Issue 4, Pages 723-748Publisher
SPRINGER
DOI: 10.1007/s10290-013-0169-y
Keywords
Foreign aid; Output (GDP); Investment; Heterogeneous panel cointegration techniques; General-to-specific approach
Categories
Ask authors/readers for more resources
The principal argument of this paper is that the effect of aid on GDP depends on a trade-off that is country specific: aid has a direct positive effect through financing investment but an indirect effect through aggregate productivity that can be negative if aid exacerbates growth-retarding factors such as poor governance. Data for 59 developing countries over 1971-2003 are analysed to explore the trade-off and highlight the heterogeneous nature of the relationship between aid and output. We show that output, aid and investment comprise a cointegrated relation, and derive country specific estimates of the long run association between aid and output. These aid-output coefficients are, on average, negative but smaller than the positive investment-output coefficients. Insofar as aid is used to finance investment, the overall effect on output may therefore be positive. We also show that cross-country differences in the estimated long run aid-output coefficients can be explained mainly by cross-country differences in law and order, religious tensions and government size.
Authors
I am an author on this paper
Click your name to claim this paper and add it to your profile.
Reviews
Recommended
No Data Available