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Government Policy and the Effectiveness of Foreign Aid

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Author Info
Robert G. Murphy () (Boston College)
Nicholas G. Tresp (UBS Investment Bank)

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Abstract

This paper reconsiders the role of economic policy in determining the effectiveness of foreign aid for generating economic growth in developing countries. We update and modify the data set originally used by Burnside and Dollar (2000) in order to more fully consider the critique presented by Easterly et al. (2004). Our findings suggest that the relationship among foreign aid, government policy, and economic growth is tenuous and depends importantly on the subset of countries included in the analysis. Good policy enhances the effectiveness of foreign aid in spurring growth when we use the original set of countries included in Burnside and Dollar, but this relationship disappears for an expanded set of countries. Because the relationship among aid, policy, and growth is likely to be nonlinear, we present an alternative probit model emphasizing growth thresholds. Our results from this alternative analysis confirm the conclusions of Easterly et al., finding little support for the view that good policy increases the probability that foreign aid contributes to growth.

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Publisher Info
Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 647.

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Length: 18 pages
Date of creation: 09 Aug 2006
Date of revision: 29 Aug 2006
Handle: RePEc:boc:bocoec:647

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Related research
Keywords: foreign aid; economic development; economic growth; government policy; development assistance;

Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
O23 - Economic Development, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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  1. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," The Journal of Development Studies, Taylor and Francis Journals, vol. 37(6), pages 17-41, August. [Downloadable!] (restricted)
  2. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," The Journal of Development Studies, Taylor and Francis Journals, vol. 37(6), pages 66-92, August. [Downloadable!] (restricted)
  3. Easterly, William & Rebelo, Sergio, 1993. "Fiscal policy and economic growth: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 417-458, December. [Downloadable!] (restricted)
    Other versions:
  4. Jeffrey D. Sachs & Andrew Warner, 1995. "Economic Reform and the Process of Global Integration," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(1995-1), pages 1-118. [Downloadable!]
  5. William Easterly & Ross Levine & David Roodman, 2004. "Aid, Policies, and Growth: Comment," American Economic Review, American Economic Association, vol. 94(3), pages 774-780, June. [Downloadable!]
  6. Craig Burnside & David Dollar, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September. [Downloadable!] (restricted)
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  7. Newlyn, Walter T, 1973. "The Effect of Aid and Other Resource Transfers on Savings and Growth in Less-Developed Countries: A Comment," Economic Journal, Royal Economic Society, vol. 83(331), pages 867-69, September. [Downloadable!] (restricted)
  8. Easterly, William & Levine, Ross, 1997. "Africa's Growth Tragedy: Policies and Ethnic Divisions," The Quarterly Journal of Economics, MIT Press, vol. 112(4), pages 1203-50, November.
    Other versions:
  9. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
  10. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Griffin, Keith, 1973. "The Effect of Aid and Other Resource Transfers on Savings and Growth in Less-Developed Countries: A Comment," Economic Journal, Royal Economic Society, vol. 83(331), pages 863-66, September. [Downloadable!] (restricted)
  12. Levy, Victor, 1987. "Does Concessionary Aid Lead to Higher Investment Rates in Low-Income Countries?," The Review of Economics and Statistics, MIT Press, vol. 69(1), pages 152-56, February. [Downloadable!] (restricted)
  13. Papanek, Gustav F, 1973. "Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries," Journal of Political Economy, University of Chicago Press, vol. 81(1), pages 120-30, Jan.-Feb.. [Downloadable!] (restricted)
  14. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer. [Downloadable!] (restricted)
  15. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February. [Downloadable!] (restricted)
  16. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April. [Downloadable!] (restricted)
  17. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06. [Downloadable!] (restricted)
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  18. R. Lensink & H. White, 2001. "Are There Negative Returns to Aid?," The Journal of Development Studies, Taylor and Francis Journals, vol. 37(6), pages 42-65, August. [Downloadable!] (restricted)
  19. Jeffrey Sachs & Andrew Warner, 1995. "Economic Reform and the Progress of Global Integration," Harvard Institute of Economic Research Working Papers 1733, Harvard - Institute of Economic Research.
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