Is Aid Pro-cyclical?

Studies on the aid business cycle present competing findings on the question whether aid is pro- or counter-cyclical. Some scholars state that it is pro-cyclical, some said that it is not clearly pro-cyclical, and some others argue that aid is counter-cyclical. The literature review discusses these different findings while taking note of the different opinions and perspectives on accurate measurement of aid cyclicality. The pro-cyclicality of aid stands in contrast with the expectation that aid can be used as a development tool, for filling in the economic gaps in developing countries This research tries to combine those scholarly notions by asking the question, is aid pro-cyclical with respect to different aggregates that are possible expressions of the economic cycle? This question aims to measure the pro-cyclicality of aid to some relevant aggregates that represent the economic cycle of a country, namely export earnings, remittances, FDI and revenue. The results show that aid is pro-cyclical with all aggregates. It shows that aid has not been acting as an effective development tool in most of low and lower middle-income countries.