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Does foreign aid really raise per capita income? A time series perspective


  • Dreher is also affiliated with CESIfo, IZA, KOF Swiss Economic Institute, University of Goettingen, Courant Research Center ‘Poverty, equity, growth.’ Klasen is also affiliated with CESifo, IZA, and Goettingen's Courant Research Center ‘Poverty, equity, growth in developing countries.’ Martinez-Zarzoso is also affiliated with the Department of Economics, Universidad Jaume I. Financial support from the German Research Foundation (DFG GZ: DR 640/2-1) and from the Spanish Ministry of Science and Technology (ECO 2010-15863) is gratefully acknowledged. We would like to thank two anonymous referees for helpful comments and suggestions and Scott Jobson for excellent proof reading. Earlier versions of this paper were presented at the Development Economics study group meeting of the University of Göttingen, the XII Applied Economics Meeting in Madrid, the 2010 annual meeting of the Verein für Socialpolitik in Kiel, the conference of the Research Committee on Development Economics of the German Economic Association in Frankfurt and the International Conference on Policy Modelling (EcoMod 2010) in Istanbul. The authors would like to thank the participants of these fora for helpful comments and suggestions. Email:;;;;


Abstract.  We analyze the relationship between per capita income and foreign aid. We employ annual data and five-year averages and carefully examine the time-series properties of the data. Panel estimations with dynamic feasible generalized least-squares (DFGLS) show that aid generally has an insignificant or minute negative significant impact on per capita income (particularly in highly aid-dependent countries). This holds true for countries with different levels of human development and income, as well as for different regions. We also find that aid has a small positive impact on investment, but a significant negative impact on domestic savings (crowding out) and the real exchange rate (appreciation). JEL classification: F35, O11, C23, C51


On analyse la relation entre le revenu per capita et l’aide étrangère. On utilise des données annuelles et des moyennes quinquennales, et on examine les propriétés de ces séries chronologiques. Des estimations d’un modèle dynamique utilisant des données de panel à l’aide de la méthode des moindres carrés quasi-généralisés montrent que l’aide a généralement un effet négatif minime ou insignifiant sur le revenu per capita (particulièrement dans les pays qui dépendent beaucoup de l’aide étrangère). Ce résultat tient tant pour des pays à divers niveaux de développement et de revenus que pour différentes régions. On découvre que l’aide a un petit effet positif sur l’investissement, mais un effet négatif significatif sur l’épargne (effet d’encombrement) et sur le taux de change réel (appréciation).