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Evaluating The Impact Of Foreign Aid On Economic Growth: A Cross-Country Study

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  • Sandrina Berthault Moreira

    ()
    (College of Business Administration Setubal Polytechnic)

Abstract

One branch of the literature on aid effectiveness attempts to measure the contribution of foreign aid to the growth of developing countries. The micro results are clear and encouraging: foreign aid is beneficial to economic growth. However, until recently, the macro results were inconclusive: the impact of aid on growth was positive, negative, or even non-existent, in statistical terms. This contradiction is known as the ¡°micro-macro paradox¡±. Certain methodological and econometric flaws inherent in the assessments being carried out up to the mid-nineties may provide an explanation for the misleading macro results. Examining a large panel data set, I have found that foreign aid has had a positive impact on economic growth. In light of these findings, I conclude that earlier-generation work is in accordance with the new and recent generation of aid effectiveness studies. Thus, less importance should be attributed to the ¡°micro-macro paradox¡± as an overall appraisal of aid effectiveness. In terms of magnitude, I have also found that aid has less effect on growth in the short-run than in the long-run. I also conclude that the time lags in the aid-growth relationship should not be ignored.

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Bibliographic Info

Article provided by Chung-Ang Unviersity, Department of Economics in its journal Journal Of Economic Development.

Volume (Year): 30 (2005)
Issue (Month): 2 (December)
Pages: 25-48

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Handle: RePEc:jed:journl:v:30:y:2005:i:2:p:25-48

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Related research

Keywords: Foreign Aid; Economic Growth; Panel Data; Generalised Method of Moments;

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References

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  1. Tarp, Finn, 2006. "Aid and Development," MPRA Paper 13171, University Library of Munich, Germany.
  2. Patrick GUILLAUMONT & Lisa CHAUVET, 1999. "Aid and Performance: A Reassessment," Working Papers 199910, CERDI.
  3. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
  4. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  5. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
  6. Lensink, Robert & White, Howard, 1999. "Are there negative returns to aid?," Research Report 99E60, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
  7. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
  8. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-41, September.
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Cited by:
  1. Yousuf, Ahmed Sadek, 2012. "Assessing Impact of Health Oriented Aid on Infant Mortality Rates," EconStor Preprints 67391, ZBW - German National Library of Economics.
  2. Kwabena Gyimah-Brempong & Jeffrey S. Racine, 2014. "Aid and Economic Growth: A Robust Approach," Department of Economics Working Papers 2014-03, McMaster University.
  3. Wamboye, Evelyn & Adekola, Abel, 2013. "Foreign Aid, Legal Origin, Economic Growth and Africa’s Least Developed Countries," MPRA Paper 47846, University Library of Munich, Germany.
  4. Wamboye, Evelyn, 2012. "Quantity or quality? foreign aid implications on economic growth in least developed countries," MPRA Paper 39518, University Library of Munich, Germany.
  5. Yousuf, Ahmed Sadek, 2012. "Impact of Health Aid on Infant Mortality Rate," MPRA Paper 42945, University Library of Munich, Germany, revised 12 Oct 2012.

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