Working Paper: NBER ID: w22164
Authors: Sebastian Galiani; Stephen Knack; Lixin Colin Xu; Ben Zou
Abstract: 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.
Keywords: aid; economic growth; quasi-experiment; instrumental variable; IDA threshold
JEL Codes: O10; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reduction in aid (F35) | Decline in investment rate (E22) |
| Decline in investment rate (E22) | Impact on growth (F69) |
| Crossing the IDA income threshold from below (I24) | Reduction in aid (F35) |
| Aid (F35) | Growth (O00) |
| Crossing the IDA income threshold from below (I24) | Growth (O00) |