Is the Relationship Between Aid and Economic Growth Nonlinear?

46 Pages Posted: 3 Oct 2006 Last revised: 15 Jan 2012

See all articles by Andros Kourtellos

Andros Kourtellos

University of Cyprus - Department of Economics; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Chih Ming Tan

University of North Dakota - College of Business & Public Administration - Department of Economics

Xiaobo Zhang

International Food Policy Research Institute (IFPRI)

Date Written: January 10, 2007

Abstract

In this paper, we investigate the relationship between foreign aid and growth using recently developed sample splitting methods that allow us to uncover evidence for the existence of heterogeneity and nonlinearity simultaneously. We also implement a new methodology that allows us to deal with model uncertainty in the context of these methods. We find some evidence that aid may have heterogeneous effects on growth across two growth regimes defined by ethnic fractionalization. In particular, countries that belong to a growth regime characterized by levels of ethnic fractionalization above a threshold value experience a negative partial relationship between aid and growth, while those in the regime with ethnic fractionalization below the threshold experience no growth effects from aid at all. Nevertheless, there exists substantial model uncertainty so that attempts to pin down the typology of these growth regimes as being decisively characterized by ethnic fractionalization remain inconclusive. When we account for model uncertainty, we find no evidence to suggest that the relationship between aid and growth is nonlinear. Overall, our results suggest that the partial effect of aid on growth is very likely to be negative although we cannot reject the hypothesis that aid has no effect on growth. In this sense, our findings suggest that aid is potentially counterproductive to growth with outcomes not meeting the expectations of donors.

Keywords: Economic Growth, Aid, Threshold Regression, Regression Trees, Bayesian model averaging

JEL Classification: C11, C14, C45, F35, O11, O40

Suggested Citation

Kourtellos, Andros and Tan, Chih Ming and Zhang, Xiaobo, Is the Relationship Between Aid and Economic Growth Nonlinear? (January 10, 2007). Journal of Macroeconomics, Vol. 29, No. 3, 2007, Available at SSRN: https://ssrn.com/abstract=933991

Andros Kourtellos (Contact Author)

University of Cyprus - Department of Economics ( email )

75 Kallipoleos Street
P.O. Box 20537
1678 Nicosia
Cyprus

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Chih Ming Tan

University of North Dakota - College of Business & Public Administration - Department of Economics ( email )

293 Centennial Drive Stop 8369
Grand Forks, ND 58202-8369
United States

HOME PAGE: http://sites.google.com/site/chihmingtan/home

Xiaobo Zhang

International Food Policy Research Institute (IFPRI) ( email )

2033 K Street, NW
Washington, DC 20006
United States
202-862-5677 (Phone)
202-467-4439 (Fax)

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