Growth with endogenous migration hump and the multiple, dynamically interacting effects of aid in poor developing countries

We show empirically that aid given to poor developing countries enhances growth and reduces emigration, once several dynamically interacting effects of aid are taken into account in a system of equations. We estimate equations for net immigration flows as a share of the labour force and Gross Domestic Product Per Capita (GDPPC) growth and also for all their regressors including remittances and official development aid. We use dynamic panel data methods for a sample of poor countries with GDPPC below $1200 (2000), for which aid is about 9.5% of GDP. The partial effects in these regressions are working against each other. Therefore, we integrate all equations into a dynamic system and run a simulation. One result is an endogenous migration hump with several peaks. In a counterfactual simulation, we double aid with the consequence that for more than a 100 years migration is reduced and the GDPPC is enhanced, because the positive effects of aid on investment and education dominate the negative direct effects of aid on growth and the unfavourable effects on savings, tax revenues and labour force growth.