"HISTORY," JAWAHARLAL NEHRU famously observed, "is almost always written by the victors. " I Financial history, it seems, is written by the creditors. When a financial crisis arises, it is the debtors who are asked to take the blame. This is odd, since a loan agreement invariably has two parties. The failure of a loan usually represents miscalculations on both sides of the transaction or distortions in the lending process itself. The East Asian financial crisis has so far been true to form. As soon as the crisis hit in mid-1997, the International Monetary Fund (IMF), which led the official international response, assigned primary responsibility to the shortcomings of East Asian capitalism, in particular, the East Asian financial markets. The IMF's principal strategy for the three countries hardest hit-Indonesia, Korea, and Thailand-was to overhaul their financial systems. The basic diagnosis was that East Asia had exposed itself to financial chaos because its financial systems were riddled by insider dealing, corruption, and weak corporate governance, We are grateful for excellent research assistance from Mumtaz Hussain, Dilip Parajuli, Amar Hamoudi, and Gopal Garuda, and for valuable input from Frank Flatters. We also thank very much our discussants, Richard Cooper and Barry Bosworth, for their comments and suggestions. This work was partially sponsored by the Office of Emerging Markets, Economic Growth Center, Bureau for Global Programs, Field Support and Research, U.S. Agency for International Development, under the Consulting Assistance on Economic Reform (CAER) II project (contract PCE-0405-C-00-5015-00). The views and interpretations in this paper are those of the authors and should not be attributed to USAID. 1. Nehru (1946, p. 287). 1 7. Sachs (1984); Cooper and Sachs (1985). 8. Diamond and Dybvig (1983).

Recent research yields widely divergent estimates of the cross-country relationship between foreign aid receipts and economic growth. We propose and test two reasons for this divergence, both of which relate to the timing of effects between aid and growth. First, these studies have insufficiently considered the lag with which aid might affect growth, particularly certain kinds of aid. Second, they have sought to reduce the bias from contemporaneous reverse causation with the use of instrumental variables that appear to be invalid, weak, or both. We reanalyze data from the three most influential published aid-growth studies, strictly conserving their regression specifications, adding sensible assumptions about timing and avoiding questionable instruments. With these changes, the research designs from all of these studies yield one finding: that increases in aid have been followed on average by modest increases in investment and growth. The most plausible explanation is that aid causes some degree of growth in recipient countries, though the magnitude of this relationship is modest, varies greatly across recipients, and diminishes at high levels of aid. www.cgdev.orgThe Center for Global Development is an independent, nonprofit policy research organization dedicated to reducing global poverty and inequality and to making globalization work for the poor. Use and dissemination of this Working Paper is encouraged; however, reproduced copies may not be used for commercial purposes. Further usage is permitted under the terms of the Creative Commons License.The views expressed in CGD Working Papers are those of the authors and should not be attributed to the board of directors or funders of the Center for Global Development. Forthcoming in Economic JournalAbstract: Recent research yields widely divergent estimates of the cross-country relationship between foreign aid receipts and economic growth. We propose and test two reasons for this divergence, both of which relate to the timing of effects between aid and growth. First, these studies have insufficiently considered the lag with which aid might affect growth, particularly certain kinds of aid. Second, they have sought to reduce the bias from contemporaneous reverse causation with the use of instrumental variables that appear to be invalid, weak, or both. We reanalyze data from the three most influential published aid-growth studies, strictly conserving their regression specifications, adding sensible assumptions about timing and avoiding questionable instruments. With these changes, the research designs from all of these studies yield one finding: that increases in aid have been followed on average by modest increases in investment and growth. The most plausible explanation is that aid causes some degree of growth in recipient countries, though the magnitude of this relationship is modest, varies greatly across recipients, and diminishes at high levels of aid. JEL Classification Numbers: F35, O11, O19. * We benefited greatly from extensive discussions with W...

Economic Crises: Evidence and Insights from East Asia THE EAST ASIAN crisis is only the latest in a series of spectacular economic catastrophes in developing countries. In the past twenty years at least ten countries have suffered from the simultaneous onset of currency crises and banking crises. This has led to full-blown economic crises, in many cases with GDP contractions of 5 to 12 percent in the first year and negative or only slightly positive growth for several years after. Many other countries have experienced contractions of similar magnitude following currency or banking crises. Financial crises are not strictly exogenous; in many cases the slowdown itself, or the very factors that led to it, have helped to cause a financial crisis. But there is no doubt that the standard features of financial crises, including overshooting exchange rates, withdrawal of foreign capital, failure to roll over short-term debts, internal credit crunches, and the process of disintermediation have also been important. Crises are also becoming increasingly frequent, at least relative to the post-World War II period. There has been, in Gerard Caprio's memorable phrase, a "boom in bust[s]."' Caprio and Daniela Klinge-We wish to thank Andrew Berg, Amar Bhattacharya, William Easterly, Eve Gerber, Will Martin, Lant Pritchett, John Williamson, participants of seminars at Harvard University and the Centre for Economic Policy Research, and the Brookings Panel, especially our discussants, Barry Bosworth and Steven Radelet, for helpful comments. Jessica Seddon, Dennis Tao, and Maya Tudor provided excellent research assistance. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors; they do not necessarily represent the views of the World Bank, its executive directors, or the countries they represent. 1. Caprio (1997, p. 81). 1 Brookings Papers on Economic Activity, 2:1998 biel identify banking crises-defined as episodes when the entire banking system has zero or negative net worth-in sixty-nine countries since the late 1970s. The U.S. savings and loan (S&L) debacle would probably not be in the top fifty international banking crises since the early 1980s, although the cost of resolving it was 3.2 percent of GDP, several times more, in real terms, than that of resolving the U.S. banking crisis in the 1930s.2 With a less stringent definition, Carl-Johan Lindgren, Gillian Garcia, and Matthew Saal estimate that three-quarters of the member countries of the International Monetary Fund (IMF) experienced "significant bank sector problems" at some time between 1980 and 1995.3 Currency crises have been similarly pervasive. Jeffrey Frankel and Andrew Rose define a currency crisis as a year in which the currency depreciates by more than 25 percent, where this depreciation is at least 10 percentage points higher than depreciation in the previous year. By this definition, at least eighty-seven countries have suffered currency crises since 1975, and currency crises have also become more common recently...

Yet it is also true that small events at times have large consequences, that there are such things as chain reactions and cumulative forces. It happens that a liquidity crisis in a unit fractional reserve banking system is precisely the kind of event that can trigger-and often has triggered-a chain reaction. And economic collapse often has the character of a cumulative process. Let it go beyond a certain point, and it will tend for a time to gain strength from its own development as its effects spread and return to intensify the process of collapse. Because no great strength would be required to hold back the rock that starts a landslide, it does not follow that the landslide will not be of major proportions.

Recent research yields widely divergent estimates of the cross-country relationship between foreign aid receipts and economic growth. We propose and test two reasons for this divergence, both of which relate to the timing of effects between aid and growth. First, these studies have insufficiently considered the lag with which aid might affect growth, particularly certain kinds of aid. Second, they have sought to reduce the bias from contemporaneous reverse causation with the use of instrumental variables that appear to be invalid, weak, or both. We reanalyze data from the three most influential published aid-growth studies, strictly conserving their regression specifications, adding sensible assumptions about timing and avoiding questionable instruments. With these changes, the research designs from all of these studies yield one finding: that increases in aid have been followed on average by modest increases in investment and growth. The most plausible explanation is that aid causes some degree of growth in recipient countries, though the magnitude of this relationship is modest, varies greatly across recipients, and diminishes at high levels of aid.