The Impact of Foreign Aid on Economic Growth: Volatility of Disbursements and Distribution of Receipts

This paper is concerned with the effects of aid transfers and their degree of volatility on economic growth. We develop a theoretical framework that distinguishes the allocation of foreign aid between productive and nonproductive uses. On the one hand, devoting aid inflows into productive public spending promotes growth while the related volatility has a damaging effect. On the other hand, the non-productive use of aid transfers has an adverse effect on growth while their volatility is growth-enhancing. The theoretical implications are supported by an empirical specification, formulated on similar grounds, for a panel of 74 aid-recipient countries over the time period from 1972 to 1998. The empirical results are found to be robust in a variety of sensitivity tests.