The long-run effect of aid on health: evidence from panel cointegration analysis

Although a major objective of aid donors is to improve health outcomes in recipient countries, there is relatively little research on whether aid to the health sector leads to improved health outcomes, and even less on the impact of total aid. This paper examines the relationship between total aid and population health using panel cointegration and causality techniques designed to deal with problems afflicting previous aid-health studies: spurious regressions, omitted variables, endogeneity, cross-sectional dependence, and parameter heterogeneity. The main results are: (i) aid has, on average, a small but negative long-run effect on health, (ii) while the long-run (or trend) effect of aid on health is negative, the short-run (temporary) effect of aid on health is positive, (iii) causality runs in only one direction, from aid to health, and (iv) aid worsens health mainly in sub-Saharan countries, but has a positive, albeit statistically insignificant, long-run impact on health in Latin American and Caribbean countries and in countries with negative values of net ODA.