Foreign aid network diversification and its impact on growth, growth acceleration, and growth spell

A diversified aid network could improve growth by reducing volatility. Alternatively, it could harm growth by encouraging waste and corruption. In this paper we test the effect of aid diversification on growth, growth acceleration, and growth duration. Using a large data set with a maximum of 126 countries over the period 1965–2010 and estimating three types of models (panel vector auto regression, binary dependent variable, and duration), we find the following. First, a diversified aid network Granger causes growth. Second, the “growth acceleration episodes” identified following the definition of Hausmann et al. (Journal of Economic Growth, 2005, 10, 303–329) do not seem to be affected by aid diversification. Third, the “growth spells” identified using Berg et al.’s definition appear to be prone to premature termination as a result of aid concentration. Our results appear to be robust to a wide array of tests and alternative measures of aid diversification.