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

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  • M.Yusuf Tashrifov
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    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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    File URL: https://crawford.anu.edu.au/degrees/idec/working_papers/IDEC05-10.pdf
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    Bibliographic Info

    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
    Date of revision:
    Handle: RePEc:idc:wpaper:idec05-10

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    1. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
    2. Robert J. Barro & Paul M. Romer, 1991. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr91-1, May.
      • Robert J. Barro & Paul Romer, 1993. "Economic Growth," NBER Books, National Bureau of Economic Research, Inc, number barr93-1, May.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. Easterly, W & Levine, R, 1996. "Africa's Growth Tragedy : Policies and Ethnic Divisions," Papers 536, Harvard - Institute for International Development.
    8. William Easterly, 2003. "Can Foreign Aid Buy Growth?," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 23-48, Summer.
    9. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    10. 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.
    11. 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, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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