Natural Disasters, Foreign Aid, and Economic Growth

This paper explores the impact of foreign aid on economic growth using variation in aid inflows from natural disasters. Because using a country's own disaster exposure as an instrument for aid inflows violates exogeneity assumptions, I instead use the disaster exposure of a country's "aid neighbors," defined as its competitors for aid from donors. Using aid neighbor droughts to instrument for aid, I show that aid inflows significantly increase per capita GDP growth in the short to medium run due to increased household consumption, while physical capital investment actually falls. I find no evidence of any long-run aid-growth effects