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Three Views on Aid and Growth

“Aid and Growth” Steve Radelet Center for Global Development June 21, 2006 MDB Meeting on Debt Issues. Three Views on Aid and Growth. View #1: No relationship, or a negative relationship Boone, Rajan & Subramanian Almost always assumes a linear relationship. View #2: Conditional Relationship.

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Three Views on Aid and Growth

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  1. “Aid and Growth”Steve RadeletCenter for Global DevelopmentJune 21, 2006MDB Meeting on Debt Issues

  2. Three Views on Aid and Growth View #1: No relationship, or a negative relationship • Boone, Rajan & Subramanian • Almost always assumes a linear relationship

  3. View #2: Conditional Relationship • Depends on recipients (good governance; strong policies) • Burnside & Dollar, Collier & Dehn • Interaction term, assumes linear relationship • Fragile (Easterly, Levine, & Roodman) • Conditional relationship could also depend on the characteristics of donors, but not well researched.

  4. View #3: Positive relationship, on average, with diminishing returns • Hansen & Tarp; Hajimichael, et. al, 1995; Durbarry et al, 1998; Lensink and White, 2001; and Dalgaard, et al, 2004 • Diminishing returns • Less well known

  5. “Counting Chickens” • Key characteristics: Diminishing returns and disaggregation • Three Categories of Aid • Focus on “early-impact” aid with most direct plausible connections to growth, with diminishing returns

  6. 2SLS 2SLS 2SLS

  7. OLS OLS

  8. Connections to other strands of the literature: What do the results look like with diminishing returns and disaggregation? • Burnside & Dollar • Hansen and Tarp • Rajan & Subramanian

  9. Links to Burnside and Dollar 1

  10. Links to Burnside and Dollar 2

  11. Links to Burnside and Dollar 3

  12. Rajan and Subramanian: No independent variable in R&S is consistently associated with growth (not just aid)

  13. R&S mostly impose linearity • 71 regression results; 65 test linear relationship. No surprise these results are weak. • 6 non-linear, all positive coefficients (some but not all statistically significant) • Only one nonlinear with a disaggregated aid variable. Positive and significant, supporting the basic idea of “Chickens.”

  14. Reproduces R&S Table 4A, columns 3-5

  15. First column reproduces R&S Table 9, col. 1. Second column reproduces R&S Table 10, column 1.

  16. First column reproduces R&S Table 9, col. 1. Second column reproduces R&S Table 10, column 1.

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