The Effect of Aid on Growth: Evidence from a Quasi-Experiment
The literature on aid and growth has not found a convincing instrumental variable to identify the causal effects of aid. This paper exploits an instrumental variable based on the fact that since 1987, eligibility for aid from the International Development Association (IDA) has been based partly on whether or not a country is below a certain threshold of per capita income. The paper finds evidence that other donors tend to reinforce rather than compensate for reductions in IDA aid following threshold crossings. Overall, aid as a share of gross national income (GNI) drops about 59 percent on average after countries cross the threshold. Focusing on the 35 countries that have crossed the income threshold from below between 1987 and 2010, a positive, statistically significant, and economically sizable effect of aid on growth is found. A one percentage point increase in the aid to GNI ratio from the sample mean raises annual real per capita growth in gross domestic product by approximately 0.35 percentage points.
We are grateful for valuable comments by several anonymous referees, George Clarke, Michael Clemens, Yingyao Hu, Aart Kraay, Martin Ravallion, and seminar participants at the 2013 Southern Economics Association Annual Meeting, the University of Toronto, Xiamen University, and the Center for Global Development. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Ben Zou's time was partially covered by a World Bank short-term consultant contract.
- The drop in aid experienced by countries after they cross a pre-defined income threshold provides opportunity to identify aid's...
Sebastian Galiani & Stephen Knack & Lixin Colin Xu & Ben Zou, 2017. "The effect of aid on growth: evidence from a Quasi-experiment," Journal of Economic Growth, Springer, vol. 22(1), pages 1-33, March. citation courtesy of