Subramanian, 2008). In addition, we considered it important to include the FSU dummy, as the countries of FSU have experienced rapid reform with economic downturns and remarkable growth thereafter. **_Time Dummies:_** We used the crisis dummy as a time designation, rather than normal time dummies such as annual or decadal time dummies. To have a crisis dummy attached, the period has to contain one of the following: Debt Crisis (1982-83), Asian Financial Crisis (1997-98), or the World Financial Crisis (2008-09). This dummy takes care of time-fixed effects (λt and λt’)<sup>11</sup> caused mostly by crises.

# **Instruments**

Endogeneity of aid is one of the inevitable limitations of aid-growth studies.<sup>12</sup> In light of the shortcoming, instrument variable (IV) estimators are commonly used in the regression analyses. The current study used standardized instruments of lagged values for the levels (including instruments of lagged period averages for explanatory variables of period averages), and initial value and lagged rate of changes for growth spells. Instrumented explanatory variables are identified in the tables of the regression results. In growth regressions for the national average income (Eq. 1), variables of trade, institutions, and aid, except for their initial values, were instrumented.<sup>13</sup> In regressions for the poorest quintile income (Eqs. 2 & 3), only national average per capita income was instrumented. In the same manner, only income growth spells were instrumented in the Gini convergence regressions (Eq. 4). In the poverty change (P-G-I) regressions (Eq. 5), Gini changes were instrumented.

# **3. Data**

The medium-term data set was constructed as a base for the analyses in this study, since our interest is in the impact seen over the medium to long run. The growth spells of the different time durations are compiled from the available data points of bottom-quintile income shares during the period from 1978 to 2010.<sup>14</sup> This medium-term database contains 242 growth spells of the five to nine-year period, each with the average duration of 5.72 years, for 98 countries. Out of these, the growth spells of aid sectoral analyses were obtained in accordance with data availability for sectoral aid. The number of observations for sectoral aid is lower, as it was available only after the year 1995. The data for sectoral aid analysis contains 183 growth spells for 60 countries. The data for aggregate aid, which was available during the period of 1978-2010, contains 216 growth spells for 87 countries. When comparing the regression results of sectoral aid and aggregate aid, the sample period of aggregate aid was restricted to match that of sectoral aid. Actual

> 11 The compound error term can be decomposed into three components of cross-country fixed effects, time-fixed effects, and a random error term.

> 12 For further discussion see Hansen & Tarp, 2001, pp. 554-561; Clemens et al., 2004, pp. 26-27; Dalgaard et al, 2004, pp. 201-208; Hudson, 2004, p. 187; and Rajan and Subramanian, 2008, pp. 645-650.

> 13 We posited that there were no significant endogeneity issues for other variables when assessing their impact on inequality. We took the judgment on the usage of IV similar to Dollar and Kraay (2002, pp. 204-205). 14 If the data was not available for the full spell, the period average ratio was calculated with the data that was available.

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