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Foreign aid, institutional quality and economic growth: Evidence from the developing world

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  • Maruta, Admasu Asfaw
  • Banerjee, Rajabrata
  • Cavoli, Tony

Abstract

This paper examines the effect of sectoral foreign aid and institutional quality on the economic growth of 74 developing countries from Africa, Asia and South America, and covers the period 1980–2016. We consider bilateral aid flows into three sectors, namely education, health and agriculture, and find that among the three types of aid, education aid is more effective for aid-receiving countries. The effect is conditional on the current level of institutional quality and varies substantially across regions. While education aid is more effective in South America, health aid is more effective in Asia and agricultural aid is more effective in Africa. As the level of institutional quality improves, the gap between the marginal effect of education, health and agricultural aids widen. Our findings have strong policy implication for donor countries and international aid organisations, which shows that it is more desirable to shift aid flows towards the education sector as the level of institutional quality improves.

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  • Maruta, Admasu Asfaw & Banerjee, Rajabrata & Cavoli, Tony, 2020. "Foreign aid, institutional quality and economic growth: Evidence from the developing world," Economic Modelling, Elsevier, vol. 89(C), pages 444-463.
    • Handle: RePEc:eee:ecmode:v:89:y:2020:i:c:p:444-463
    DOI: 10.1016/j.econmod.2019.11.008
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    18. Mina Baliamoune‐Lutz & George Mavrotas, 2009. "Aid Effectiveness: Looking at the Aid–Social Capital–Growth Nexus," Review of Development Economics, Wiley Blackwell, vol. 13(3), pages 510-525, August.
    19. Philipp Harms & Matthias Lutz, 2004. "The Macroeconomic Effects of Foreign Aid: A Survey," University of St. Gallen Department of Economics working paper series 2004 2004-11, Department of Economics, University of St. Gallen.
    20. Coviello, Decio & Islam, Roumeen, 2006. "Does aid help improve economic institutions ?," Policy Research Working Paper Series 3990, The World Bank.

    More about this item

    Keywords

    Foreign aid; Institutional quality; Economic growth;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth
    • O57 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Comparative Studies of Countries

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