Does Aid Crash During Crises? A Sharper Look

Last fall, as stocks tumbled and credit froze, I blogged on how much foreign aid has fallen in past financial crises. I found that in four previous cases---Finland, Japan, Norway, and Sweden, all in the early 1990s---foreign aid fell 10---62%. The bigger drops happened in bigger crises. The analysis was easy to understand, but crude. One factor it ignored was that the Cold War rationale for foreign aid had just crumbled, so many countries were cutting aid anyway.Emmanuel Frot of the Stockholm Institute of Transition Economics just performed a more careful analysis. He adds two more crises: South Korea in 1997 and the United States in 1988. (The U.S. stock market did crash in '87, but I don't know that that constituted a financial crisis...) And he uses more sophisticated statistical techniques to remove broad time trends such as the ending of the Cold War.He corroborates my simple findings, but comes in at the optimistic end. Past experience suggests to him that the global aid could fall 13 percent this time around.Of course, history might not repeat itself. Owen Barder reports that the UK has not cut its aid in the new budget, despite a shrinking economy. Here in the U.S., the story looks similar, though less certain since Congress is still working through the spending decisions for the next fiscal year. Only time will tell if this time is different.