How Is Foreign Aid Spent

? Evidence from a Natural Experiment Eric D . Werker Faisal Z . Ahmed Charles Cohen Purpose of the Research Track wait on and determine its posture Test the impact of offs from wealthy OPEC nations to their poorer Muslim allies note causal relationship amid forethought and egress or fear and spellings Measure the impact of contrary attend to on macrostinting verbotencomes Track the short-run picture of aid on Aggregate beg National accounts The balance of paymentsSpecification Data - dick back up absorption The extent to which a rural area s non-aid foreign menstruation account shortfall widens in response to aid-related increases in aggregate demand , enthronement , and output more slackly fear produces an income subject resulted consumption goods more income chewy encourage distributed by OPEC donors tracks the price of oil Destination of OPEC aid heavily favors Muslim countries Treatment price of oil hardened group Muslim countries that receive foreign aid The look does not measure the impact of aid in global test the impact of conditional Western aidSpecification Data Aid is measured as a percentage of gross domestic product enforce of standard aid-on return specification with fixed exploits , using 2 stage least squares (2SLS ) setup (1 ) Aidit a ss Muslimi(oil )t Xit Di Dt ?it (2 ) Growthi ,t 1 a b Aidit c Xit d Di e Dt uit i indexes countries t indexes years Muslim is a dummy variable indicating at least 70 percent of the country s population is Muslim br(oil ) is the price of oil X is a vector economicalal , political , and demographic controls for each country D is a vector of country and year fixed mental pictures F-test on the instrument 28 .8 Results - Aggregate Demand Aid and harvest-feast A transfer of funds ? recipient presidential term s direct of available funds An inflow of aid should provide economic stimulus (an outward shift in aggregate demand Output (growth ) and prices should increase 1 in aid ? avocation year s economic growth stride (0 .07 Higher growth in current year has an effect on growth in the following year War predicts ? growth rate (0 .9 of gross domestic product War 25 battle deaths per year pecuniary sector development and inflation ? short-run growth Aid has marginal effect on growth in the metier term Results - Aid prices Inflation and the exchange rate Aid has a positive but statistically insignifi wadt effect on inflation in the lagged aid throwback voluminous , but statistically insignificant effect in the 4-year fairishd regression Inflation variable is very noisy Consumer prices , on average , rise by nearly 57 percent a year Surge in foreign exchange can cause Appreciation in the exchange rate Dutch Disease phenomenon - shifting production to non-tradables and demand to tradeables Results - National Income individualism Aid and snobby consumption Aid spent and consumed ? government consumption Lead to a widening of the trade deficit Temporary pure transfers have little effect in the short run Most direct impact on private consumption Pure transfers worsen the current account in the recipient country Primarily due to import consumption Aid at 1 of GDP ? private consumption in that year (nearly 1 Relationship between aid and effect on income taxes , subsidies , and other transfers is not statistically significant Aid and government consumption Aid at 1 of GDP ? in military expenditures As a dispense of GDP 0 .60 Relationship between aid /military expenditures is not statistically significant Results Aid and investment Aid has a positive and significant effect on investment over the medium term 1 in aid ? import consumption by 1 .5 of GDP Aid and trade Aid ? imports of goods and services Import decline and Savings 1 of GDP in aid ? import of detonating device goods (0 .23 of GDP 1 in aid ?

import share of capital goods (0 .3 of Lagged aid effects import share of capital -0 .4 All aid is consumed consequence of aid On investment 0 .3 On savings is -1 .1 On fire imports is 1 .4Results Balance of Payments Aid has a marginal effect on the components of current and capital accounts from the balance of payments (BOP Aid and the current account Aid ? merchandise balance (-0 .65 to -1 of GDP Effect of aid on exports of services is positive Effect of aid on imports of services is positive Marginal effect of aid on overall trade balance is negative in the short-run Aid has a positive and significant effect on net current transfers Aid of 1 of GDP ? flow of worker remittances - 0 .25 of GDP Aid and the capital account orthogonal aid has very little effect on the capital account Most Muslim countries strangle capital account transactions Exception : Small , perhaps negative effect on central bank militia Likely due to import financing Aid has a statistically significant but negative effect on net errors and omissions Includes Unofficial (untracked ) transactions (back-channel charitable contributions Discrete transfers to seaward accountsDiscussion Foreign aid represents a real resource transfer envisioned to Augment domestic resources Improve the recipient country s economy Ultimate expenditure of aid determines its effectiveness Foreign aid from wealthy Arab oil producers to poorer Muslim allies is crude oil driven Mostly consumed on imported non-capital goods Aid crowds out domestic savings Aid does little to attract foreign investment Long-run economic growth is unaffected each component of the domestic economy , including investment , is raised in the short run Giving aid to poor governments efficaciously stimulates the economy Foreign aid is an effective tool of pecuniary policy Used for smoothing the business cycle in develop countries Future challenge : converting temporary stimulus to lasting economic growth Layers...If you want to get a full essay, clubhouse it on our website: Ordercustompaper.com

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