Aid, Shocks, and Growth

21 Pages Posted: 20 Apr 2016

See all articles by Paul Collier

Paul Collier

University of Oxford - Blavatnik School of Government

Jan Dehn

Centre for the Study of African Economoies, University of Oxford

Date Written: October 2001

Abstract

Not surprisingly, extreme negative export price shocks reduce growth. But these adverse effects 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.

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.

Collier and Dehn 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.

This paper - a product of the Office of the Director, Development Research Group - is part of a larger effort in the group to assess the impact of aid. The authors may be contacted at pcollier@worldbank.org or jandehn@yahoo.com.

Suggested Citation

Collier, Paul and Dehn, Jan, Aid, Shocks, and Growth (October 2001). World Bank Policy Research Working Paper No. 2688. Available at SSRN: https://ssrn.com/abstract=632756

Paul Collier (Contact Author)

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

Jan Dehn

Centre for the Study of African Economoies, University of Oxford ( email )

Oxford
United Kingdom

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