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​Aid, Growth and Causality

LTD Editors's picture

Last week's Free Exchange blog, run by The Economist, has a post titled 'Aid to the Rescue'.  The piece cites a recent paper by Sebastian Galiani, Stephen Knack, Colin Xu and Ben Zou, which attempts to gauge the effects of aid on growth. Pondering whether it pays for donors to contribute 0.7% of national income toward development assistance, the piece goes on to explain the complexities of establishing causality when analyzing the pay offs from aid.  

Using the IDA threshold of $1,205 per year (the cut off for eligibility to receive highly concessional funds from IDA, the Bank's fund for the poorest) as an “instrumental variable”, Knack et al find that receiving less concessional aid indeed takes a toll (albeit small) on growth. The authors look at 35 countries and find that, for every 1% of national income a country receives in aid, annual growth in real income per person rises by approximately one third of a percentage point in the short term.

Other research findings, including by Markus Brückner, Osborne Jackson, Hristos Doucouliagos, Martin Paldam, and experts affiliated with UNU-WIDER, are also summarized in the Free Exchange post.

Comments

Submitted by John Coonrod on

I think Galiani et all are addressing the wrong question, because the analysis assumes that the purpose of aid is economic growth. The purpose of aid should be to end poverty and hunger on a sustainable basis, for which economic growth may or may not be relevant -- and may often be counterproductive as it may simply increase inequality and leave the poorest behind. The question - as Gandhi famously phrased it - is does aid restore the poorest to control over their own lives and destinies.

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