Aid and Local Growth in Malawi

Abstract

We study the local impact of foreign aid allocated to districts and constituencies in Malawi over the period 1999–2013 using a highly detailed new aid database that includes annual disbursements at each project location. First, we show using household panel surveys that growth in light density is a good proxy for growth in per capita consumption. Second, we introduce a new dataset that permits a novel instrumental variables strategy. We find a consistent and quantitatively significant relationship between aid and growth. Constituency-level regressions point to a larger effect than at district level, suggesting that aid is associated with some relocation of activity across space but not enough to make the net effect zero. The effect on growth is at its highest immediately after its disbursement, and falls to close to zero in subsequent years, implying that foreign aid has a level effect on incomes but does not stimulate sustained growth. Aid delivered as a grant is positively related with growth, while that given as a loan is not.