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

68 Pages Posted: 11 Apr 2016 Last revised: 27 Apr 2016

See all articles by Sebastian Galiani

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 - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: April 2016

Abstract

The literature on aid and growth has not found a convincing instrumental variable to identify the causal effects of aid. This paper exploits an instrumental variable based on the fact that since 1987, eligibility for aid from the International Development Association (IDA) has been based partly on whether or not a country is below a certain threshold of per capita income. The paper finds evidence that other donors tend to reinforce rather than compensate for reductions in IDA aid following threshold crossings. Overall, aid as a share of gross national income (GNI) drops about 59 percent on average after countries cross the threshold. Focusing on the 35 countries that have crossed the income threshold from below between 1987 and 2010, a positive, statistically significant, and economically sizable effect of aid on growth is found. A one percentage point increase in the aid to GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points.

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 (April 2016). NBER Working Paper No. w22164. Available at SSRN: https://ssrn.com/abstract=2762071

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 - Department of Economics ( email )

East Lansing, MI 48824
United States

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