The IMF Working Papers series is designed to make IMF staff research available to a wide audience. With nearly 300 released each year, working papers cover a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
This paper brings the aid effectiveness debate to the sub-national level. We hypothesize the nonrobust
results regarding the effects of aid on development in the previous literature to arise due to
the effects of aid being insufficiently large to measurably affect aggregate outcomes. Using geocoded
data for World Bank aid to a maximum of 2,221 first-level administrative regions (ADM1)
and 54,167 second-level administrative regions (ADM2) in 130 countries over the 2000-2011
period, we test whether aid affects development, measured as nighttime light growth. Our
preferred identification strategy exploits variation arising from interacting a variable that indicates
whether or not a country has passed the threshold for receiving IDA's concessional aid with a
recipient region's probability to receive aid, in a sample of 478 ADM1 regions and almost 8,400
ADM2 regions from 21 countries. Controlling for the levels of the interacted variables, the
interaction provides a powerful and excludable instrument. Overall, we find significant
correlations between aid and growth in ADM2 regions, but no causal effects.