| Abstract: |
We present evidence on the effects of aid transfers and their degree of
volatility on economic growth and show that these effects can be categorised
in relation to the allocation of foreign aid between productive and
non-productive purposes. Using a stochastic endogenous growth model, we
provide a theoretical rationalisation for our empirical evidence. Both the
empirical and the theoretical analyses generate a pertinent conclusion:
situations in which aid actually inhibits the recipient’s growth rate may
appear if and only if aid is volatile. As a result, we conclude that it is
only in conjunction with the presence of aid variability that aid allocation
decisions determine whether aid hurts or promotes trend growth. |