VOLATILITY AND BUSINESS CYCLE PROPERTIES OF FOREIGN FINANCIAL AID INTO DEVELOPING COUNTRIES

Abstract

The objective of this study is to investigate the volatilities and business cycle characteristics of three components of foreign financial aid into developing countries, namely emergency, program and project aid from the viewpoint of both recipients and donors. Results show that emergency aid inflows are more volatile than both program and project aid in both African and non-African countries and program aid is found to be more volatile than project aid in both subsamples. Although the volatility of total aid inflows is lower than component-wise volatilities, it is still higher than the volatility of GDP for recipient countries. The volatility of donors’ total aid outflows is also found to be greater than the volatility of their GDP. Results further showed that total aid is acyclical for the African countries in the sample. The same finding applies to emergency aid, project aid, and program aid. For the non-African countries, project aid inflows were found to be procyclical. Emergency aid and program aid were acyclical while total aid inflows to the countries outside Africa were found to be procyclical/acyclical. The final result that emerged from the analysis is that donors give foreign aid in an acyclical fashion to the recipients in the sample.  

Keywords

• Foreign financial aid,developing countries,business cycle,volatility

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