Recipient country's 'policies' and the effect of foreign aid on economic growth in developing countries: additional evidence

This note adds to the research which questions the recent influential view that recipient country's 'policies' play an important role in the effect of foreign aid on economic growth in developing countries. In the first step, the almost universal practice of imposing the constraint of equality on parameters of bilateral and multilateral aid is relaxed and it is shown that 'policy' has no role in the effect of aid even in those cases where the usual constrained models do show such an effect. In addition, many cases are noted where there is no indication of recipient country's policies having any role in the effect of aid on growth even in the usual constrained specifications. These cases employ not merely the Burnside-Dollar 'policy' index, which almost all scholars have used, but also two other broader measures. It is thus concluded that there is little empirical evidence to support the widely-disseminated view that redirecting aid toward countries with 'good' policies leads to more growth and greater poverty reduction in developing countries. Copyright © 2004 John Wiley & Sons, Ltd.