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Identifying thresholds in aid effectiveness

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Abstract

In this paper, the author focuses on the nonlinear nature of the aid to growth relationship to show that the “Big Push” hypothesis is consistent with capacity constraints in the understanding of aid effectiveness. The Big Push hypothesis proposes the existence of one threshold below which aid is not effective, whereas the constraints inferred by the concept of absorptive capacity suggest the existence of a second threshold above which aid is no longer effective. This paper addresses the issue of these thresholds which characterize the aid to growth relationship. Using a semi-parametric econometric method, the author finds that aid becomes effective only above a critical level, but what is more it becomes detrimental to growth at high aid flows. The author also investigates how the quality of institutions and economic vulnerability modify the level of these two thresholds. He finds that economic vulnerability is a key factor conditioning aid effectiveness.

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Notes

  1. See Hadjimichael et al. (1995), Durbarry et al. (1998), Lensink and White (2001), Dalgaard and Hansen (2001), Hansen and Tarp (2000, 2001), Roodman 2007.

  2. Combining diminishing returns and conditional effects of aid, Collier and Dollar (2001, 2002) introduce the aid squared term besides the multiplicative "aid × policy" variable in an attempt to solve the problem of an optimal aid allocation.

  3. The same tests were conducted by specifying the following smoothing function \( f\left( {Aid, Polity} \right) \), interacting aid and the institutional quality index. Results (available upon request) confirm those provided in the “Appendix” using parametric methods. There is no evidence that institutional quality influences aid effectiveness.

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Acknowledgments

This paper benefited from the financial support of the FERDI (Fondation pour les Etudes et Recherches sur le Développement International) and of the programme “Investissements d’Avenir” (reference ANR-10-LABX-14-01) of the French Government. The author thanks an anonymous referee for helpful comments and valuable discussions.

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Authors and Affiliations

  1. Centre d’Études et de Recherches sur le Développement International (CERDI), École d’Économie, Université d’Auvergne (Clermont-Ferrand 1), 65 Bd. F. Mitterrand, 63000, Clermont-Ferrand, France

    Laurent Wagner

  2. Fondation pour les études et recherches sur le développment international (FERDI), Clermont-Ferrand, France

    Laurent Wagner

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Correspondence to Laurent Wagner.

Appendix

Appendix

See (Table 5).

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Wagner, L. Identifying thresholds in aid effectiveness. Rev World Econ 150, 619–638 (2014). https://doi.org/10.1007/s10290-014-0187-4

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