The effect of U.S. aid on growth is positive, but military and food iad have no effect; the effect is smaller for countries that are well endowed with natural resources, less ethnically polarized, and more aligned with the U.S.

Help or hindrance? U.S. aid on growth. Myongjin Kim & Leilei Shen. Applied Economics Letters, Jan 27 2020. https://doi.org/10.1080/13504851.2020.1720902

ABSTRACT: We distinguish between U.S. aid and non-U.S. aid and study the effects on growth in recipient countries. Our analysis exploits time variation in aid due to changes in the supply of U.S. aid and cross-sectional variation in a country’s tendency to receive any U.S. aid. We find that U.S. aid has a positive effect on growth. In particular, U.S. economic aid has a positive effect on growth while U.S. military and food aid have no effect on growth. There is also no evidence of U.S. aid crowding out aid from other countries. The effect of U.S. aid on growth is smaller for countries that are well endowed with natural resources, less ethnically polarized, and more aligned with the U.S.

KEYWORDS: U.S. aid, growth
JEL CLASSIFICATION: F35, O10, O40

From the 2017 version:
4 Results

We begin our analysis by rst reporting the OLS estimates of equation (2), which are presented
in columns 1 to 4 in Table 2. Columns 1 to 4 report estimates of correlation between U.S. aid
and annual real GDP per capita growth. The correlation between total U.S. aid and growth is
close to zero and statistically insigni cant. U.S. economic aid is pro-cyclical and only marginally
signi cant at 10%. U.S. food aid is counter-cyclical and signi cant at 1%. Column (5) reports the
correlation between non-U.S. aid and growth and it is close to zero and insigni cant.
Columns 6 to 9 report 2SLS estimates of equation (2). According to the estimates using the full
set of controls reported in column 6, a one percentage point increase in U.S. aid increases GDP
per capita growth by 0.19 standard deviation, or 1.7 percentage points on average. This e ect is
statistically signi cant at ve percent level. Column 7-9 suggest that the e ect of U.S. economic
aid is also positive on growth, however, U.S. military aid and food aid have no signi cant impact
on growth. Column 10 suggests that the e ect of non-U.S. aid is negative but it is statistically
insigni cant.
To assess the plausibility of the positive e ect U.S. aid on growth, it is useful to compare the
magnitude to estimates from other studies. The recent study by Arndt and Jones (2015) suggests
that one percentage point increase in all aid received is expected to boost real GDP per capita
growth rate by 0.30 percentage points in the long run. The comparison shows that the e ect of
U.S. aid on growth in our context is bigger than the e ect of total aid received on growth. Thus,
it is important to distinguish sources of aid by donor countries and types of aid when studying the
e ffects of aid on growth.
We interpret our estimates as showing that U.S. aid increases growth in recipient countries, an
alternative explanation is that U.S. aid crowds out other types of aid. For example, donor countries
may respond to an increase in U.S. aid by reducing their own aid provisions. If these other forms
of aid reduce growth, then U.S. aid crowd-out can explain why U.S. aid increases growth. It is
also possible that an increase in U.S. aid could actually cause total aid received by a country to
decline. We examine the e ect of U.S. aid on non-U.S. aid received by a country and report the
estimates in Table 3. The estimates show that U.S. aid does not crowd out aid from other donor
countries. U.S. military and food aid have no e ect on the provision of aid from non-U.S. donor
countries, and U.S. economic aid has a positive e ffect.
We also consider the influences of other factors that may contribute to growth. We nd the
e ects of U.S. aid on growth are not heterogeneous across the following factors: income, political
institutions, ethnic diversity, alignment with the U.S., and natural resource dependence.