How is Foreign Aid Spent? Evidence from a Natural Experiment
May 22, 2008
PAPER ABSTRACT: We use oil price fluctuations to test the impact of transfers from wealthy OPEC nations to their poorer Muslim allies. We investigate how aid is spent by tracking its short-run effect on aggregate demand, the national accounts, and the balance of payments. We find that much aid is consumed, primarily in the form of imported non-capital goods. Some aid is invested and aid has a positive, though statistically imprecise, effect on growth. Aid has no effect on the financial account but leads to unaccounted capital flight. *The Massachusetts Avenue Development Seminar (MADS) series is an effort by the Center for Global Development and The Paul H Nitze School of Advanced International Studies to take advantage of the incredible concentration of great international development scholars in the Metro Washington, DC area. The series seeks to bring together members of this community and improve communication between them. |