Quantity or quality? foreign aid implications on economic growth in least developed countries

Using panel data for the period of 1975-2011, this study attempts to answer the question of whether the quantity or quality of foreign aid matters to economic growth of least developed countries (LDCs). Quality effects are captured using different specifications of both bilateral and multilateral aid. The quantity effects are measured by the squared term on the aid variable. The timing of effects between aid and growth are controlled for using both short term (annual) and long term (5-year averaged) panel data. Issues of endogeneity, measurement bias, simultaneity and reverse causality are addressed. Generally, after controlling for trade, fiscal and monetary policies and other institutional factors, results from this study support the conclusion that quantity rather than quality of aid matters for economic growth of LDCs. These results are robust to different samples and estimation techniques. Nonetheless, the study does not discount the importance of the quality of aid, rather, emphasizes that regardless of the type of aid flows, quantity and continuous flow is important for LDCs.