How Is Foreign Aid Spent? Evidence from a Natural Experiment

Eric D. Werker · Faisal Z. Ahmed

175 citations0/0 files storedAmerican Economic Journal Macroeconomics

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International Development and Aid Monetary Policy and Economic Impact Global Financial Crisis and Policies

Abstract

We use oil price fluctuations to test the impact of transfers from wealthy OPEC nations to their poorer Muslim allies. The instrument identifies plausibly exogenous variation in foreign aid. We investigate how aid is spent by tracking its short-run effect on aggregate demand, national accounts, and balance of payments. Aid affects most components of GDP though it has no statistically identifiable impact on prices or economic growth. Much aid is consumed, primarily in the form of imported noncapital goods. Aid substitutes for domestic savings, has no effect on the financial account, and leads to unaccounted capital flight. (JEL F35, O19)

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2019American Economic Review n.d.Financial Development and Economic Growth: Views and Agenda 2000Who Gives Foreign Aid to Whom and Why?1996Reopening the convergence debate: A new look at cross-country growth empirics 1990Equipment Investment and Economic Growth 1967Foreign Assistance and Economic Development 2002The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics 1996Politics and the effectiveness of foreign aid

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