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UNU-WIDER Aid, Volatility and Growth Again: When Aid Volatility Matters and When It Does Not

Support functions

A teenager wears torn rubber boots in a muddy local market in Bac Ha, Viet Nam. As of 2005 figures, half the world population—more than 3 billion people–is estimated to live on less than USD 2.50 a day. Bac Ha, Viet Nam. UN Photo/Kibae Park.

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Aid, Volatility and Growth Again: When Aid Volatility Matters and When It Does Not

In previous papers we have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e., aid is more effective in countries that are more vulnerable to external shocks). Recently an important debate has emerged about the possible negative effects of aid volatility itself. However, the cushioning effect of aid may involve some volatility in aid flows, which then is not necessarily negative for growth. In this paper we examine to what extent the time profile of aid disbursements may contribute to an increase or a decrease of aid effectiveness. We first show that aid, even if volatile, is not clearly as procyclical as often argued, and, even if procyclical, is not necessarily destabilizing. We measure aid volatility by several methods and assess procyclicality of aid with respect to exports, thus departing from previous literature, which usually assesses procyclicality of aid with respect to national income or fiscal receipts. The stabilizing/destabilizing nature of aid is measured by the difference in the volatility of exports and the volatility of the aid plus exports flows. Then, in order to take into account the diversity of shocks to which aid can respond, we consider the effect of aid on income volatility and again find that aid is making growth more stable, while its volatility reduces this effect. Finally, we find evidence through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to its stabilizing effect.
WIDER Research Paper
Aid, Volatility and Growth Again: When Aid Volatility Matters and When It Does Not
Lisa Chauvet and Patrick Guillaumont
Publication date:
September 2008
ISBN 13 Web:
Copyright holder:
Copyright year:
aid, shocks, stability, growth
F35, F43, O42
Conference on 'Aid: Principles, Policies and Performance'
UNU-WIDER gratefully acknowledges the financial contribution to the conference by the Finnish Ministry for Foreign Affairs.

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