Aid, Shocks, and Growth
Analysis of the relationship between aid and growth by Burnside and Dollar found that the better a country's policies, the more effective aid is in raising growth in that country. But this result has been criticized for being sensitive to choi...
| Main Authors: | , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2001/10/1614893/aid-shocks-growth http://hdl.handle.net/10986/19508 |
| Summary: | Analysis of the relationship between aid
and growth by Burnside and Dollar found that the better a
country's policies, the more effective aid is in
raising growth in that country. But this result has been
criticized for being sensitive to choice of sample and for
neglecting shocks. The authors incorporate export price
shocks into the analysis of aid's effect on growth.
They construct export price indices using the approach
pioneered by Deaton and Miller. They locate shocks by
differencing the indices, removing predictable elements from
the stationary process, and normalizing the residuals.
Extreme negative shocks are the bottom 2.5 percent tail of
this distribution. Introducing these extreme shocks into the
Burnside-Dollar regression, the authors find that they are
highly significant: unsurprisingly, extreme negative shocks
reduce growth. Once these shocks are included, the
Burnside-Dollar results become robust to choice of sample.
Moreover, the adverse effects of negative shocks on growth
can be mitigated through offsetting increases in aid.
Indeed, targeting aid to countries experiencing negative
shocks appears to be even more important for aid
effectiveness than targeting aid to countries with good
policies. But the authors show that, overall, donors have
not used aid for this purpose. |
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