Aid and growth in Malawi

We study the local impact of foreign aid to constituencies and districts 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 political dataset that permits novel instrumental variables. Using two instruments, together or separately, we find a consistent, robust and quantitatively significant role for aid in causing growth in light density. Constituency-level regressions point to a larger effect than at district level, suggesting that aid causes some relocation of activity across space but not enough to make the net effect zero. The impact on growth peaks after two to three years but then falls to zero, implying that foreign aid has a level effect on incomes but does not stimulate sustained growth. Bilateral aid appears to be better in causing growth than multilateral aid. Aid delivered as a grant has an impact while that given as a loan does not.