The Long-Run Effect of Foreign Aid on Domestic Output

Konferenzbeitrag

This paper makes two main contributions. First, we examine the long-run effect of foreign aid on domestic output for 59 developing countries using heterogeneous panel cointegration techniques to control for omitted variable and endogeneity bias and to detect possible cross-country differences in the output effect of aid. The main result is that aid has, on average, a negative long-run effect on output, but there are large differences across countries (in about a third of cases the effect is positive). Second, we use a general-to-specific variable selection approach to systematically search for country-specific factors explaining the cross-country differences in the estimated long-run effect of aid. In contrast to previous studies, we find that aid effectiveness does not depend primarily on factors such as the quality of economic policy, the share of a country's area that is in the tropics, the level of democracy or political stability. The results suggest that the cross-country heterogeneity in the output effect of aid can be explained mainly by cross-country differences in law and order, religious tensions and government size.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Proceedings of the German Development Economics Conference, Hannover 2010 ; No. 1

Classification and Topics

• Classification: Wirtschaft ; Foreign Aid ; Macroeconomic Analyses of Economic Development ; Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models ; Model Evaluation, Validation, and Selection
• Subject: Foreign aid ; Domestic output ; Heterogeneous panel cointegration techniques ; General-to-specific approach

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Herzer, Dierk ; Morrissey, Oliver
• Event: Veröffentlichung
• (who): Verein für Socialpolitik, Ausschuss für Entwicklungsländer
• (where): Göttingen
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/39996
• Last update: 10.03.2025, 11:41 AM CET