New evidence on aid effectiveness: assessing the links between economic growth, volatility and aid

Using a panel dataset of more than 100 countries over the period 1960 to 2005 and using a two-equation system that analyzes jointly the determinants of both economic growth and volatility in growth, we find evidence that first, aid raises economic growth and lowers volatility in growth and second, that volatility in aid lowers economic growth and raises volatility in growth. Within a framework that conceives of economic development as the promotion of stable economic growth, this paper establishes a case for increasing stable aid flows to developing countries in order to promote economic development. The high volatile nature of aid disbursed that characterizes the current aid architecture is an issue that needs to be addressed by the international donor community in order to make aid more effective.