The Effect of Aid on Growth: Evidence from a Quasi-Experiment

60 Pages Posted: 25 Feb 2014 Last revised: 26 Mar 2015

Sebastian Galiani

University of Maryland - Department of Economics

Stephen Knack

World Bank - Development Research Group (DECRG)

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Ben Zou

Michigan State University

Multiple version iconThere are 3 versions of this paper

Date Written: March 23, 2015

Abstract

The literature on aid and growth has not found a convincing instrumental variable to identify the causal effects of aid. In this paper we exploit an instrumental variable based on the fact that since 1987, a major criterion for IDA (International Development Association) eligibility has been whether or not a country is below a certain threshold of per capita income. We find evidence that other donors tend to reinforce rather than compensate for reductions in IDA aid following threshold crossings. Overall, the aid to GNI ratio drops about 59% on average after countries cross the threshold. Focusing on the 35 countries that have crossed the IDA income threshold from below between 1987 and 2010, we find a positive, statistically significant, and economically sizable effect of aid on growth. A one percentage point increase in the aid to GNI ratio from the sample mean raises annual real per capita GDP growth by approximately 0.35 percentage points. We show that the main channel through which aid promotes growth is by increasing physical investment.

Keywords: Aid effectiveness; growth; causal effect and quasi-experiment

JEL Classification: O1, O4

Suggested Citation

Galiani, Sebastian and Knack, Stephen and Xu, Lixin Colin and Zou, Ben, The Effect of Aid on Growth: Evidence from a Quasi-Experiment (March 23, 2015). Available at SSRN: https://ssrn.com/abstract=2400752 or http://dx.doi.org/10.2139/ssrn.2400752

Sebastian Galiani (Contact Author)

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

Stephen Knack

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-9712 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/sknack

Lixin Colin Xu

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

Ben Zou

Michigan State University ( email )

486 W. Circle Drive
110 Marshall-Adams Hall
East Lansing, MI 48824
United States

HOME PAGE: http://zouben.weebly.com/

Paper statistics

Downloads
1,392
Rank
8,928
Abstract Views
5,717