Counting Chickens when they Hatch: Timing and the Effects of Aid on Growth

Authors


  •  Corresponding author: Michael A. Clemens, Center for Global Development, 1800 Massachusetts Ave. NW, Suite 300, Washington, DC 20036, USA. Email: mclemens@cgdev.org.

  • We benefited greatly from extensive discussions with William Easterly, Aart Kraay, Simon Johnson, David Roodman, and Arvind Subramanian. We appreciate numerous substantive suggestions from Martin Alsop, Nancy Birdsall, François Bourguignon, William Cline, Paul Collier, Shanta Devarajan, Alan Gelb, Stephen Knack, Daniel Morrow, Peter Timmer, Nicholas Stern, Mark Sundberg, Jeremy Weinstein, Adrian Wood, four anonymous referees, and seminar participants at the Center for Global Development (CGD), the World Bank, the International Monetary Fund, American University, the US Treasury, the UK Department for International Development and the US Agency for International Development. We are grateful for the assistance of Valérie Gaveau and Virginia Braunstein of the OECD. This research was generously supported by the William and Flora Hewlett Foundation and CGD. All viewpoints and any errors are the sole responsibility of the authors and do not represent CGD, its Board of Directors, or its funders.

Abstract

Recent research yields widely divergent estimates of the cross-country relationship between foreign aid receipts and economic growth. We re-analyse data from the three most influential published aid–growth studies, strictly conserving their regression specifications, with sensible assumptions about the timing of aid effects and without questionable instruments. All three research designs show that increases in aid have been followed on average by increases in investment and growth. The most plausible explanation is that aid causes some degree of growth in recipient countries, although the magnitude of this relationship is modest, varies greatly across recipients and diminishes at high levels of aid.

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