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Aid, Volatility and Growth,with special reference to Africa

Author

Listed:
  • Lisa CHAUVET
  • Patrick GUILLAUMONT

    (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

Abstract
In two previous papers we have argued that aid is likely to mitigate the negative effects of external shocks on economic growth (i.e. that aid is more effective in countries which 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, hence 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 in Africa. We first show that aid, even if volatile, is not clearly as pro-cyclical as often argued, and that, even if pro-cyclical, is not necessarily destabilizing. We measure aid volatility by two methods and assess pro-cyclicality of aid with respect to exports, thus departing from previous literature, which usually assess pro-cyclicality 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 aid and the volatility of the a aid plus exports. We then evidence through growth regressions that the higher effectiveness of aid in vulnerable countries is to a large extent due to a stabilizing effect. Finally we consider the implications of this effect for income volatility.

Suggested Citation

  • Lisa CHAUVET & Patrick GUILLAUMONT, 2006. "Aid, Volatility and Growth,with special reference to Africa," Working Papers 200640, CERDI.
    • Handle: RePEc:cdi:wpaper:862
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    References listed on IDEAS

    as
    1. Stéphane Pallage & Michel A. Robe, 2001. "Foreign Aid and the Business Cycle," Review of International Economics, Wiley Blackwell, vol. 9(4), pages 641-672, November.
    2. Graciela L. Kaminsky & Carmen M. Reinhart & Carlos A. Végh, 2005. "When It Rains, It Pours: Procyclical Capital Flows and Macroeconomic Policies," NBER Chapters, in: NBER Macroeconomics Annual 2004, Volume 19, pages 11-82, National Bureau of Economic Research, Inc.
    3. Eifert, Benn & Gelb, Alan, 2005. "Improving the dynamics of aid : towards more predictable budget support," Policy Research Working Paper Series 3732, The World Bank.
    4. Ramey, Garey & Ramey, Valerie A, 1995. "Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review, American Economic Association, vol. 85(5), pages 1138-1151, December.
    5. Robert Lensink & Oliver Morrissey, 2000. "Aid instability as a measure of uncertainty and the positive impact of aid on growth," Journal of Development Studies, Taylor & Francis Journals, vol. 36(3), pages 31-49.
    6. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
    7. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
    8. Bulír, Ales & Hamann, A. Javier, 2008. "Volatility of Development Aid: From the Frying Pan into the Fire?," World Development, Elsevier, vol. 36(10), pages 2048-2066, October.
    9. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
    10. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    11. Rand, John & Tarp, Finn, 2002. "Business Cycles in Developing Countries: Are They Different?," World Development, Elsevier, vol. 30(12), pages 2071-2088, December.
    12. Mr. A. J Hamann & Mr. Aleš Bulíř, 2001. "How Volatile and Unpredictable Are Aid Flows, and What Are the Policy Implications?," IMF Working Papers 2001/167, International Monetary Fund.
    13. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
    14. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    15. Ale Bulir & A. Javier Hamann, 2003. "Aid Volatility: An Empirical Assessment," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 1-4.
    16. Hnatkovska, Viktoria & Loayza, Norman, 2004. "Volatility and growth," Policy Research Working Paper Series 3184, The World Bank.
    17. repec:bla:reviec:v:9:y:2001:i:4:p:641-72 is not listed on IDEAS
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    Cited by:

    1. Patrick GUILLAUMONT & Maëlan LE GOFF, 2010. "Aid and remittances: their stabilizing impact compared," Working Papers P12, FERDI.
    2. Crispin Malingumu Syosyo, 2013. "Aide Publique Au Developpement Et Croissance Economique Au Congo-Kinshasa En Periode De Post-Conflit," Post-Print hal-03119512, HAL.

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