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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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    Cited by:

    1. 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).
    2. 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.

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