The allocation of volatile aid and economic growth: Theory and evidence

We analyse, both theoretically and empirically, the growth effects associated with two components of volatile foreign financial assistance: 'directly productive' (or 'tied') aid and 'pure' aid. We find that scenarios in which aid can hurt the recipient's growth rate emerge only in cases where foreign aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation determines whether foreign aid hurts or promotes long-run growth.