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 c...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2010/02/11745307/links-between-aid-volatility-growth http://hdl.handle.net/10986/19914 |
| Summary: | 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. |
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