General budget support as an aid instrument-Impact on economic growth

Abstract

Since the change of the new millennium, general budget support (GBS) has become a prominent, yet controversial and heavily debated, modality for delivering aid. We study GBS as an aid instrument from a cross-country perspective. We examine if any growth impacts can be identified as a result of the use of GBS. We use data covering nine 4-year intervals from 1976 to 2011. We modify two supply-side IV strategies from previous aid-growth literature. In our main approach, we employ an interaction of an exogenous supply-side variable (donor government fractionalization) and an endogenous variable (probability of receiving GBS) as an instrument for GBS, and in the alternative approach we construct an instrument following a supply-side approach. Our results suggest that GBS receiving countries have grown faster than countries receiving other types of aid. Selection bias does not explain this result. The growth effect is not only attributed to lagged GBS but also to contemporaneous GBS flows.