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Policy, Aid and Growth: A Threshold Hypothesis

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  • Philip Denkabe

    () (Department of Economics, New York University)

Abstract

This study examines the contribution of foreign aid to economic growth in the context of macroeconomic policy. Using certain macroeconomic indicators as policy variables I construct a dynamic growth equation which is estimated by way of Generalized Method of Moments. In generating the estimation, attention is focused on country-specific effects and the non-linearity in the contribution of aid to economic growth arising from the interaction between aid and macroeconomic policy. Findings suggest the existence of a threshold value of aid, defined by macroeconomic policy, below which aid tends to have a positive impact on economic growth and beyond which diminishing returns to aid may generate a non,-positive impact on growth. For two economies characterized by different macroeconomic policies, similar aid inflows will gave different effects on economic growth. As compared to a 'good' policy environment, a 'bad' policy environment experiences diminishing returns to aid relatively more quickly, due to the inability to effectively absorb aid.

Suggested Citation

  • Philip Denkabe, 2004. "Policy, Aid and Growth: A Threshold Hypothesis," Journal of African Development, African Finance and Economic Association, vol. 6(1), pages 1-21.
  • Handle: RePEc:afe:journl:v:6:y:2004:i:1:p:1-21
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    References listed on IDEAS

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    1. David E. Bloom & David Canning & Pia N. Malaney, 1999. "Demographic Change and Economic Growth in Asia," CID Working Papers 15, Center for International Development at Harvard University.
    2. Rafael La Porta & Florencio Lopez-De-Silanes & Andrei Shleifer, 2002. "Government Ownership of Banks," Journal of Finance, American Finance Association, vol. 57(1), pages 265-301, February.
    3. Easterly, William & Kremer, Michael & Pritchett, Lant & Summers, Lawrence H., 1993. "Good policy or good luck?: Country growth performance and temporary shocks," Journal of Monetary Economics, Elsevier, vol. 32(3), pages 459-483, December.
    4. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, pages 1077-1106.
    5. David E. BLOOM & Jocelyn E. FINLAY, 2009. "Demographic Change and Economic Growth in Asia," Asian Economic Policy Review, Japan Center for Economic Research, vol. 4(1), pages 45-64.
    6. Ross Levine & Norman Loayza & Thorsten Beck, 2002. "Financial Intermediation and Growth: Causality and Causes," Central Banking, Analysis, and Economic Policies Book Series,in: Leonardo Hernández & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Banking, Financial Integration, and International Crises, edition 1, volume 3, chapter 2, pages 031-084 Central Bank of Chile.
    7. Easterly, William, 2001. "The Lost Decades: Developing Countries' Stagnation in Spite of Policy Reform 1980-1998," Journal of Economic Growth, Springer, vol. 6(2), pages 135-157, June.
    8. Ghiath Shabsigh & Ilker Domaç, 1999. "Real Exchange Rate Behavior and Economic Growth; Evidence from Egypt, Jordan, Morocco, and Tunisia," IMF Working Papers 99/40, International Monetary Fund.
    9. Solow, Robert M., 2000. "Growth Theory: An Exposition," OUP Catalogue, Oxford University Press, edition 2, number 9780195109030.
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    Cited by:

    1. Saima Liaqat & Temesgen Kifle & Mohammad Alauddin, 2016. "Aid-Macroeconomic Policy Environment- Growth Nexus: Evidence from Selected Asian Countries," Discussion Papers Series 565, School of Economics, University of Queensland, Australia.
    2. Wako, Hassen, 2016. "Aid, institutions and economic growth: Heterogeneous parameters and heterogeneous donors," MERIT Working Papers 009, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

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