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Counting Chickens When They Hatch: Timing and the Effects of Aid on Growth - Michael A. Clemens, Steven Radelet, Rikhil R. Bhavnani, and Samuel Bazzi

Counting Chickens When They Hatch: Timing and the Effects of Aid on Growth - Michael A. Clemens, Steven Radelet, Rikhil R. Bhavnani, and Samuel Bazzi

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Published by: Pensées Noires on Oct 13, 2011
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10/25/2011

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Working Paper 44July 2004
(Revised 9-6-11)
Counting Chickens WhenThey Hatch: Timing and theEffects of Aid on Growth
Abstract
Recent research yields widely divergent estimates o the cross-country relationship between oreignaid receipts and economic growth. We propose and test two reasons or this divergence, both o  which relate to the timing o eects between aid and growth. First, these studies have insufciently considered the lag with which aid might aect growth, particularly certain kinds o aid. Second, they have sought to reduce the bias rom contemporaneous reverse causation with the use o instrumentalvariables that appear to be invalid, weak, or both. We reanalyze data rom the three most inuentialpublished aid-growth studies, strictly conserving their regression specications, adding sensibleassumptions about timing and avoiding questionable instruments. With these changes, the researchdesigns rom all o these studies yield one nding: that increases in aid have been ollowed on averageby modest increases in investment and growth. e most plausible explanation is that aid causessome degree o growth in recipient countries, though the magnitude o this relationship is modest,varies greatly across recipients, and diminishes at high levels o aid.
 JEL Codes:
F35, O11, O19
www.cgdev.org
Michael A. Clemens, Steven Radelet,Rikhil R. Bhavnani, and Samuel Bazzi
 
Counting Chickens When ey Hatch:Timing and the Eects of Aid on Growth
Michael ClemensCenter or Global DevelopmentSteven RadeletUSAIDRikhil R. BhavnaniUniv. o Wisconsin–MadisonSamuel BazziUniversity o Caliornia–San Diego
Michael Clemens et al. 2004. “Counting Chickens When ey Hatch: Timing andthe Eects o Aid on Growth.” CGD Working Paper 44. Revised September 6, 2011. Washington, D.C.: Center or Global Development.http://www.cgdev.org/content/publications/detail/2744
Center for Global Development 1800 Massachusetts Ave., NW  Washington, DC 20036
202.416.4000() 202.416.4050
 www.cgdev.org 
e Center or Global Development is an independent, nonprot policy research organization dedicated to reducing global poverty and inequality and to making globalization work or the poor. Use and dissemination o this Working Paper is encouraged; however, reproduced copies may not beused or commercial purposes. Further usage is permitted under the termso the Creative Commons License.e views expressed in CGD Working Papers are those o the authors andshould not be attributed to the board o directors or unders o the Centeror Global Development.
 
Counting chickens when they hatch:Timing and the effects of aid on growth
Michael A. Clemens
Center for Global DevelopmentSteven RadeletU.S.A.I.D.Rikhil R. BhavnaniUniv. of Wisconsin, MadisonSamuel BazziUniv. of California, San DiegoSeptember 6, 2011
Forthcoming in
Economic Journal 
Abstract:
Recent research yields widely divergent estimates of the cross-country relationshipbetween foreign aid receipts and economic growth. We propose and test two reasons for thisdivergence, both of which relate to the timing of effects between aid and growth. First, thesestudies have insufficiently considered the lag with which aid might affect growth, particularlycertain kinds of aid. Second, they have sought to reduce the bias from contemporaneousreverse causation with the use of instrumental variables that appear to be invalid, weak,or both. We reanalyze data from the three most influential published aid-growth studies,strictly conserving their regression specifications, adding sensible assumptions about timingand avoiding questionable instruments. With these changes, the research designs from all of these studies yield one finding: that increases in aid have been followed on average by modestincreases in investment and growth. The most plausible explanation is that aid causes somedegree of growth in recipient countries, though the magnitude of this relationship is modest,varies greatly across recipients, and diminishes at high levels of aid.
JEL Classification Numbers:
F35, O11, O19.
We benefited greatly from extensive discussions with William Easterly, Aart Kraay, Simon Johnson,David Roodman, and Arvind Subramanian. We appreciate numerous substantive suggestions from MartinAlsop, Nancy Birdsall, Fran¸cois Bourguignon, William Cline, Paul Collier, Shanta Devarajan, Alan Gelb,Stephen Knack, Daniel Morrow, Peter Timmer, Nicholas Stern, Mark Sundberg, Jeremy Weinstein, AdrianWood, four anonymous referees, and seminar participants at the Center for Global Development (CGD),the World Bank, the International Monetary Fund, American University, the U.S. Treasury, the UK Depart-ment for International Development, and the U.S. Agency for International Development. We are gratefulfor the assistance of Valérie Gaveau and Virginia Braunstein of the OECD. This research was generouslysupported by the William and Flora Hewlett Foundation and CGD. All viewpoints and any errors are thesole responsibility of the authors and do not represent CGD, its Board of Directors, or its funders.

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