Working Paper: CEPR ID: DP961
Authors: Alessandra Casella; Barry Eichengreen
Abstract: This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction hopes to reduce its share of the cost by outlasting its opponents in obstructing the required policies. Since the delay is used to signal each faction's strength, the effect of the transfer depends on the role it plays in the release of information. We show that this role depends on the timing of the transfer: foreign aid decided and transferred sufficiently early into the game leads to earlier stabilization; but aid decided or transferred too late is destabilizing and encourages further postponement of reforms.
Keywords: stabilization; foreign aid; distributional struggle
JEL Codes: E63; F35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Timing of foreign aid (F35) | Timing of stabilization (E63) |
| Early foreign aid (F35) | Earlier stabilization (C62) |
| Late foreign aid (F35) | Delay in concessions (D15) |
| Delay in concessions (D15) | Postponement of necessary reforms (E69) |
| Knowledge of forthcoming aid (F35) | Reduced urgency to stabilize (E63) |
| Timing of foreign aid (F35) | Postponement of necessary reforms (E69) |
| Timing of foreign aid (F35) | Conflict between costs of stabilization and benefits of delaying (D15) |