Promises, Promises: Aid Volatility and Economic Growth
Describes how, by creating uncertainty about the net return to education, aid volatility can mitigate agents' incentives to invest in skills
Abstract
Empirical contributions show that there is robust statistical evidence that aid volatility tends to have an adverse effect on economic growth. However, the channels through which such volatility operates have not been fully articulated in endogenous growth models. Dwelling on a recent analytical contribution, this brief describes how, by creating uncertainty about the net return to education, a high degree of aid volatility can mitigate agents鈥� incentives to invest in skills. If savings and growth depend on the composition of the labor force, and if more skilled workers are more productive, aid volatility may therefore have an adverse effect on the average growth rates of investment and output.
This work is part of the 鈥楩inancial Volatility, Macroprudential Regulation and Economic Growth in Low-Income Countries鈥� project
Citation
Ag茅nor, P-R. (2016) Promises, Promises: Aid Volatility and Economic Growth. Fondation pour les 茅tudes et recherches sur le d茅veloppement international (FERDI) Policy Brief B148, May 2016