We use oil price fluctuations to test the impact of transfers from
wealthy OPEC nations to their poorer Muslim allies. The instrument
identifies plausibly exogenous variation in foreign aid. We investigate
how aid is spent by tracking its short-run effect on aggregate
demand, national accounts, and balance of payments. Aid affects
most components of GDP though it has no statistically identifiable
impact on prices or economic growth. Much aid is consumed, primarily
in the form of imported noncapital goods. Aid substitutes for
domestic savings, has no effect on the financial account, and leads
to unaccounted capital flight. (JEL F35, O19)
Werker, Eric, Faisal Z. Ahmed, and Charles Cohen.
"How Is Foreign Aid Spent? Evidence from a Natural Experiment."
American Economic Journal: Macroeconomics,
International Linkages to Development; Role of International Organizations