What Are the Links between Aid Volatility and Growth?
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World Bank, Washington, DC
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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.
Palabras clave
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