Foreign aid and domestic output in the long run
Dierk Herzer and
Oliver Morrissey
Review of World Economics (Weltwirtschaftliches Archiv), 2013, vol. 149, issue 4, 723-748
Abstract:
The principal argument of this paper is that the effect of aid on GDP depends on a trade-off that is country specific: aid has a direct positive effect through financing investment but an indirect effect through aggregate productivity that can be negative if aid exacerbates growth-retarding factors such as poor governance. Data for 59 developing countries over 1971–2003 are analysed to explore the trade-off and highlight the heterogeneous nature of the relationship between aid and output. We show that output, aid and investment comprise a cointegrated relation, and derive country specific estimates of the long run association between aid and output. These aid-output coefficients are, on average, negative but smaller than the positive investment-output coefficients. Insofar as aid is used to finance investment, the overall effect on output may therefore be positive. We also show that cross-country differences in the estimated long run aid-output coefficients can be explained mainly by cross-country differences in law and order, religious tensions and government size. Copyright Kiel Institute 2013
Keywords: Foreign aid; Output (GDP); Investment; Heterogeneous panel cointegration techniques; General-to-specific approach; F35; O11; C23; C52 (search for similar items in EconPapers)
Date: 2013
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DOI: 10.1007/s10290-013-0169-y
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