Foreign Aid and Economic Growth in Developing Countries: An Instrumental Variables Approach

Arvind Magesan

No 2015-08, Working Papers from Department of Economics, University of Calgary

Abstract: There is little consensus on the capacity for foreign aid to cause economic growth in developing countries. This is due in large part to the fact that foreign aid recipients are selected by donors, confounding identifi cation. This paper proposes an identifi cation strategy that exploits exogenous variation in foreign aid receipts generated by participation in Human Rights Treaties at the UN to identify an average causal effect of aid on growth. Our approach is valid even if the eff ect of aid is heterogeneous across recipients for unobservable reasons. We find that an additional dollar of per capita aid causes the growth rate in a recipient country to increase by 8% over four years and 5% over a decade. The e ffect is explained almost entirely by an expansion of the service industry, accompanied by a large increase in household consumption, with no evidence that aid causes "Dutch disease," as many fear it does. We conclude that aid increases growth by inducing a structural change in household demand for services.

Date: 2015-06-25
New Economics Papers: this item is included in nep-dev and nep-gro
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://econ.ucalgary.ca/sites/econ.ucalgary.ca.ma ... 61/MagesanJune15.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:clg:wpaper:2015-08

Access Statistics for this paper

More papers in Working Papers from Department of Economics, University of Calgary Contact information at EDIRC.
Bibliographic data for series maintained by Department of Economics ().