Does Aid Mitigate External Shocks?

35 Pages Posted: 16 Sep 2009

See all articles by Paul Collier

Paul Collier

University of Oxford - Blavatnik School of Government

Benedikt Goderis

The Netherlands Institute for Social Research|SCP

Date Written: May 1, 2008

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

Collier, Paul and Goderis, Benedikt, Does Aid Mitigate External Shocks? (May 1, 2008). Available at SSRN: https://ssrn.com/abstract=1473726 or http://dx.doi.org/10.2139/ssrn.1473726

Paul Collier

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

Benedikt Goderis (Contact Author)

The Netherlands Institute for Social Research|SCP ( email )

Rijnstraat 50
The Hague, 2515
Netherlands

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