Economic growth and the volatility of foreign aid

Foreign aid’s effectiveness in promoting economic growth remains mired in
controversy.We examine the impact of the volatility of aid on economic growth,
controlling for the level of aid. A four-year panel analysis is conducted encompassing
155 countries over the period 1966-2001. We find that once the volatility of aid is
controlled for, aid has a positive impact on economic growth. Correspondingly,
volatility of aid flows is found to be negatively related to growth. We found no
significant link between investment and foreign aid, but a positive correlation between
aid and consumption and a negative link between aid volatility and consumption. But
our results also indicate that aid has become a source of volatility rather than insuring
against it, and in that way may have become inimical to economic growth.

Key Words: foreign aid, volatility, economic growth

JEL codes: O4, O11, O19