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Aid, policies and growth: a nonlinear reassessment

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  • Xin Geng
  • Manuel A. Hernandez

Abstract

The association between foreign aid and growth has been controversial for decades and the evidence is quite mixed with results sensitive to data samples and modelling approaches. We reassess the relationship between aid, policy and growth implementing a novel semiparametric estimation method that allows for nonlinearities and controls for endogeneity. The results show that the aid-policy-growth relationship is complex. Aid inflows do not seem growth-enhancing, except at very high levels (above 7% of Aid/GDP), whereas the effect may arrive with a lag at lower levels. Policy improvements are positively correlated with growth at high policy levels (above the median value) but better policies do not increase aid effectiveness.

Suggested Citation

  • Xin Geng & Manuel A. Hernandez, 2020. "Aid, policies and growth: a nonlinear reassessment," Applied Economics, Taylor & Francis Journals, vol. 52(15), pages 1617-1633, March.
  • Handle: RePEc:taf:applec:v:52:y:2020:i:15:p:1617-1633
    DOI: 10.1080/00036846.2019.1677847
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