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Does foreign aid really raise per capita income? A time series perspective

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  • Felicitas Nowak‐Lehmann
  • Axel Dreher
  • Dierk Herzer
  • Stephan Klasen
  • Inmaculada Martínez‐Zarzoso
Abstract
. We analyze the relationship between per capita income and foreign aid. We employ annual data and five‐year averages and carefully examine the time‐series properties of the data. Panel estimations with dynamic feasible generalized least‐squares (DFGLS) show that aid generally has an insignificant or minute negative significant impact on per capita income (particularly in highly aid‐dependent countries). This holds true for countries with different levels of human development and income, as well as for different regions. We also find that aid has a small positive impact on investment, but a significant negative impact on domestic savings (crowding out) and the real exchange rate (appreciation). JEL classification: F35, O11, C23, C51 On analyse la relation entre le revenu per capita et l’aide étrangère. On utilise des données annuelles et des moyennes quinquennales, et on examine les propriétés de ces séries chronologiques. Des estimations d’un modèle dynamique utilisant des données de panel à l’aide de la méthode des moindres carrés quasi‐généralisés montrent que l’aide a généralement un effet négatif minime ou insignifiant sur le revenu per capita (particulièrement dans les pays qui dépendent beaucoup de l’aide étrangère). Ce résultat tient tant pour des pays à divers niveaux de développement et de revenus que pour différentes régions. On découvre que l’aide a un petit effet positif sur l’investissement, mais un effet négatif significatif sur l’épargne (effet d’encombrement) et sur le taux de change réel (appréciation).

Suggested Citation

  • Felicitas Nowak‐Lehmann & Axel Dreher & Dierk Herzer & Stephan Klasen & Inmaculada Martínez‐Zarzoso, 2012. "Does foreign aid really raise per capita income? A time series perspective," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(1), pages 288-313, February.
    • Handle: RePEc:wly:canjec:v:45:y:2012:i:1:p:288-313
    DOI: 10.1111/j.1540-5982.2011.01696.x
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    More about this item

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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