Why Aid-to-GDP Ratios?

Kurt Annen and Stephen Kosempel

No 1801, Working Papers from University of Guelph, Department of Economics and Finance

Abstract: Virtually all aid-growth regression studies normalize aid by dividing it by GDP. This paper questions the usefulness of this practice: First, there are no clear theoretical reasons for this practice unless one assumes that donors allocate aid-to-GDP ratios. Second, using aid-to-GDP ratios introduces econometric problems that most likely introduce a downward bias for the aid-growth relationship. We illustrate this point by running simulations in which aid does not affect growth by construction but find strong negative and in some cases also positive correlations when using aid-to-GDP ratios. Finally, we replicate the Burnside-Dollar study and show that there is a significant positive relationship between aid and growth when using total aid instead of the aid-to-GDP ratio. We present a similar finding when estimating aid-growth regressions using data for the last 20 years (1995--2014).

Keywords: Aid Effectiveness; aid and growth; growth convergence (search for similar items in EconPapers)
JEL-codes: O10 O19 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gue:guelph:2018-01

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