Foreign Aid and Growth at the Subnational Level

We develop a measurement strategy for the impact of foreign aid based on a regional panel vectorautoregressive model (P-VAR). We illustrate the strategy using Ugandan districts. Data for the regional units (ADM2) is assembled combining satellite sources for socio-economic activity, geo-located aid disbursements, and traditional household surveys. We find statistically significant positive and persistent effects of aid shocks on nighttime luminosity. Mapping nightlights to economic activity, the results suggest that the economic magnitude of these effects is small, but significant – with a multiplier between 2 and 3 in the medium to long-run. The P-VAR addresses endogeneity concerns associated with non-random aid assignment.

Funding: This research was supported by USAID’s Global Development Lab (The Lab) through a cooperative agreement with AidData (#AID-OAA-A-12-00096). The views expressed here do not necessarily reflect the views of USAID, the United States Government, or of AidData.