The aid-income link revisited : how plausible and robust are the results?

This study provides a re-examination of the aid-income link based on a panel data set which is downloadable at the Canadian Journal of Economics 45(1), 2012 issue. Longer time series data are available for a group of 58 countries and run from 1960 to 2007. In particular, the study aims at justifying the use of time series techniques and re-investigating whether the more recent finding that aid has an insignificant impact on per capita income is plausible and robust. Plausibility is checked by looking at the transmission channels of aid and by testing the direction of causality between aid and income and robustness is checked by investigating sub-samples of the 58 countries and by refining the model. In particular, we allow for threshold effects of aid, considering that aid might become effective after certain threshold values of other growth-determining factors have been achieved. Overall, we find that the result of an insignificant impact of aid on per capita income is robust taking a long-run perspective. Not being able to establish a significant impact of aid on income in the long run does not rule out that in the short to medium run significant positive (or negative) effects of aid can appear and, therefore, a positive short-run contribution of aid is a possible result and no counter-evidence for the findings related to the long run. In addition, we do not find any evidence that would justify the use of a model with interaction terms or with thresholds.