Aid and Growth in Malawi

We study the impact on local growth of foreign aid flows in Malawi over the period 2000–13. Using household surveys, we show that growth in light density is a good proxy for growth in household consumption. To isolate a causal impact of aid on growth, we employ two exogenous determinants of within-country disbursement: first, the ethnic affinity of a constituency or district with the sitting President; second, the portion of Parliamentarians in a constituency or district that defect to the ruling party. Using these instruments, alone or together, we identify a robust and quantitatively significant role for aid flows in causing higher growth in light density at both constituency and district level. Constituency level regressions suggest a higher effect than district level regressions, suggesting that aid flows cause a relocation of economic activity across space. We find a hump-shaped growth response over the course of three years. Bilateral aid appears to be better in causing growth than multilateral aid while grants have more impact than loans.