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More Foreign Aid, Less Financial Development

Author

Listed:
  • Altunbaş, Yener

    (The Business School, Bangor University, UK)

  • Thornton, John

    (Norwich Business School, University of East Anglia, UK and US Department of the Treasury, Office of Technical Assistance, Washington DC, USA)

  • Vasilakis, Chrysovalantis

    (The Business School, Bangor University, UK and IRES, Université Catholique de Louvain, Belgium)

Abstract

We examine whether foreign aid substitutes domestic finance. A simple theoretical model is presented to show that foreign aid might raise private consumption but reduce private borrowing, which could be consistent with undermining financial development. The results of empirical tests of the foreign aid–financial development relationship reported employing cross-sectional and panel data sets of 96 developing countries for the period 1971-2015. The results indicate that foreign aid inflows have a negative and highly significant impact on financial development in aid-recipient countries. The results are not affected by model specification, different control variables, variation in country sample, or estimation technique. To our knowledge, this is the first paper to test the foreign aid–financial development linkage. Più aiuti esteri, meno sviluppo finanziario In questo articolo esaminiamo se gli aiuti dall’estero costituiscono un sostituto dello sviluppo della finanza interna. In esso si presenta un modello teorico semplice per dimostrare che gli aiuti dall’estero possono favorire un aumento dei consumi di privati e nello stesso tempo una riduzione dei prestiti a privati. Ciò porta ad un indebolimento dello sviluppo finanziario di un paese. I risultati dei test empirici sulla relazione tra aiuti dall’estero e sviluppo finanziario riportati nell’articolo sono stati calcolati utilizzando dati panel relativi a 96 paesi in via di sviluppo nel periodo 1971-2015. I risultati indicano che i flussi degli aiuti dall’estero hanno un impatto negativo e altamente significativo sullo sviluppo finanziario dei paesi che ricevono gli aiuti. Tali risultati non sono influenzati dalla specificazione del modello, dalle variabili di controllo, da variazioni nel paese campione o da tecniche di stima. A nostra conoscenza, è questo il primo articolo che effettua dei test sul legame tra gli aiuti dall’estero e lo sviluppo finanziario dei paesi.

Suggested Citation

  • Altunbaş, Yener & Thornton, John & Vasilakis, Chrysovalantis, 2023. "More Foreign Aid, Less Financial Development," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 76(4), pages 495-528.
  • Handle: RePEc:ris:ecoint:0955
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    References listed on IDEAS

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    More about this item

    Keywords

    Foreign Aid; Financial Development; Instrumental Variables;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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