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Does aid mitigate external shocks?

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  • Paul Collier
  • Benedikt Goderis

Abstract

This paper investigates the role of aid in mitigating the adverse effects of commodity export price shocks on growth in commodity-dependent countries. Using a large cross-country dataset, we find that negative shocks matter for short-term growth, while the ex ante risk of shocks does not seem to matter. We also find that both the level of aid and the flexibility of the exchange rate substantially lower the adverse growth effect of shocks. While the mitigating effect of aid is significant in both countries with pegs and countries with floats, the effect seems to be smaller for the latter, suggesting that aid and exchange rate flexibility are partly substitutes. We investigate whether aid has historically been targeted at shock-prone countries, but find no evidence that this is the case. This suggests that donors could increase aid effectiveness by redirecting aid towards countries with a high incidence of commodity export price shocks.

Suggested Citation

  • Paul Collier & Benedikt Goderis, 2007. "Does aid mitigate external shocks?," CSAE Working Paper Series 2007-18, Centre for the Study of African Economies, University of Oxford.
  • Handle: RePEc:csa:wpaper:2007-18
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    Citations

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    Cited by:

    1. Guillaumont, Patrick & Guillaumont Jeanneney, Sylviane & Wagner, Laurent, 2017. "How to Take into Account Vulnerability in Aid Allocation Criteria and Lack of Human Capital as Well: Improving the Performance Based Allocation," World Development, Elsevier, vol. 90(C), pages 27-40.
    2. repec:ebl:ecbull:v:6:y:2008:i:41:p:1-16 is not listed on IDEAS
    3. Patrick GUILLAUMONT, 2011. "Assessing the impact of the special support measures for least developed countries: an analytical frame work and some preliminary results," Working Papers P17, FERDI.
    4. Thierry Kangoye, 2011. "On the potential of foreign aid to protect democracy against instability from trade," CERDI Working papers halshs-00556697, HAL.
    5. Thierry Somlawende KANGOYE, 2008. "On the potential of foreign aid to protect democracy against instability from trade," Working Papers 200821, CERDI.
    6. Lars M. Johansson & Jan Pettersson, 2008. "Tied Aid, Trade-Facilitating Aid or Trade-Diverting Aid?," DEGIT Conference Papers c013_008, DEGIT, Dynamics, Economic Growth, and International Trade.
    7. Paul Collier & Benedikt Goderis, 2009. "Structural policies for shock-prone developing countries," Oxford Economic Papers, Oxford University Press, vol. 61(4), pages 703-726, October.

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    More about this item

    Keywords

    commodity prices; aid; growth; external shocks;
    All these keywords.

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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