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Foreign Financial Aid, Government Policies and Economic Growth: Does the Policy Setting in Developing Countries Matter?

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Author Info
M.Yusuf Tashrifov
Abstract

Does foreign aid contribute to economic growth? If so, is the impact of aid conditional on good policies? This is a controversial issue. While the World Bank (1998) contends that the aid is effective only if recipient governments have good policies, others refute this view and argue that aid enhances economic growth regardless of the type of policies. This paper proposes new measures of policy that are more directly controlled by recipient governments. Using data from the World Bank, five panels of four-years covering the period 1974-1993 for 56 aid-receiving developing countries examine whether any significant relationship exists between foreign aid, government policies and economic growth. It is revealed that foreign aid has a positive impact on real growth per capita and this effect is not contingent upon the type of economic policies adopted by the recipient countries. It is also revealed that the log of the initial level of income is statistically significant, thus indicating conditional convergence among the countries in the sample, which contradicts the general findings of previous studies.

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Paper provided by International and Development Economics in its series International and Development Economics Working Papers with number idec05-10.

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Length: 42 pages
Date of creation: 2005
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Handle: RePEc:idc:wpaper:idec05-10

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Find related papers by JEL classification:
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
O10 - Economic Development, Technological Change, and Growth - - Economic Development - - - General

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  1. Potiowsky, Thomas & Qayum, Abdul, 1992. "Effect of Domestic Capital Formation and Foreign Assistance on Rate of Economic Growth," Economia Internazionale / International Economics, Camera di Commercio di Genova, vol. 45(2), pages 223-228.
  2. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 277-97, April. [Downloadable!] (restricted)
  3. Caselli, Francesco & Esquivel, Gerardo & Lefort, Fernando, 1996. " Reopening the Convergence Debate: A New Look at Cross-Country Growth Empirics," Journal of Economic Growth, Springer, vol. 1(3), pages 363-89, September.
  4. 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:
  5. Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, April.
    Other versions:
    • Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1, April.
  6. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer. [Downloadable!] (restricted)
  7. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February. [Downloadable!] (restricted)
  8. Eaton, Jonathan, 1989. "Foreign public capital flows," Handbook of Development Economics, in: Hollis Chenery† & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 2, chapter 25, pages 1305-1386 Elsevier. [Downloadable!] (restricted)
  9. Kwabena Gyimah-Brempong, 1992. "Aid and economic growth in LDCs: Evidence from Sub-Saharan Africa," The Review of Black Political Economy, Springer, vol. 20(3), pages 31-52, March. [Downloadable!] (restricted)
  10. Bruno, Michael & Ravallion, Martin & Squire, Lyn, 1996. "Equity and growth in developing countries : old and new perspectives on the policy issues," Policy Research Working Paper Series 1563, The World Bank. [Downloadable!]
  11. Anderson, T. W. & Hsiao, Cheng., 1980. "Estimation of Dynamic Models with Error Components," Working Papers 336, California Institute of Technology, Division of the Humanities and Social Sciences. [Downloadable!]
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