Spatial aid spillovers during transition

•We investigate spillovers arising from aid given to transitional economies.•Aid is positively related with growth in the recipient but is also negatively related with growth in other economies.•Several economic and political economy channels are identified.•Aid has a negative relationship with democracy and governance quality of neighboring nations.

We investigate whether development aid stimulates growth in transition economies, paying particular attention to the possibility of spatial spillovers arising from aid. We find that common borders and a shared historical and political heritage result in a complex set of associations between aid and growth. Aid has a positive impact on growth in the recipient country. However, the impact of aid also spills over to affect other nations. Aid appears to create positive spillovers through improved total factor productivity and possibly currency appreciation. At the same time, aid depletes human capital through emigration and it particularly adversely affects democracy and governance quality in other transition economies. On balance, aid generates net adverse growth spillovers in transition economies.