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Policy, Aid and Growth: A Threshold Hypothesis

Listed author(s):
  • Philip Denkabe


    (Department of Economics, New York University)

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    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.

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    Article provided by African Finance and Economic Association in its journal Journal of African Development.

    Volume (Year): 6 (2004)
    Issue (Month): 1 ()
    Pages: 1-21

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    Handle: RePEc:afe:journl:v:6:y:2004:i:1:p:1-21
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