Seminar: 'Foreign Aid Shocks: Evidence from a Natural Experiment in a Developing Economy'

Time: 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Sultan Mehmood (CPB)

Discussant: Henri de Groot (VU)

Language: English

Registration:  Please register by sending an email to seminars@cpb.nl.

Abstract subject
The paper exploits the sudden injections and reversals of United States foreign aid to Pakistan to identify the effects of foreign aid on the economic performance in a developing country. The variation in the amount of US aid coming to Pakistan was unanticipated and influenced by Pakistan’s nuclear ambitions (negative shock), the Soviet invasion of Afghanistan (positive shock) and the September 11 attacks (positive shock), all of which are incorporated in the sample period which ranges from 1973 to 2011. This in turn provides a rich source of exogenous variations to identify the effect of foreign development assistance on conflict and GDP per capita in an institutional setting of a developing country. It is estimated that a typical shock of world aid has negligible effects on conflict and GDP per capita in Pakistan. Nevertheless, development assistance shocks by United States has non-negligible effects. The estimations imply a typical non-military US aid shock of US$ 400 million reduces terrorism by about 6.88% and increases GDP per capita by 9.56% over the next 10 years.

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