Disentangling the Macro-Effects of Foreign Aid: The Role of Institutional Conditions in 132 Recipient Countries

This study revisits the debate surrounding the impact of Official Development Assistance (ODA), also known as foreign aid, on two macro-indicators: economic growth and child mortality. Unlike previous studies, which assessed the interaction of aid with composite indicators of recipient countries, this study examines the impacts of individual recipient factors, such as corruption, democracy, income, wars and exports. To overcome the issue of an inverse causal relationship potentially existing between the amount of aid received and macro-performance, a model of donor aid allocation is specified within an instrumental variables framework. The results show that ODA is more likely to be positively associated with economic growth in countries with lower levels of corruption. This positive association is evident when the level of corruption is at least one standard deviation lower than the recipient’s average. The interaction of ODA with recipients’ levels of democracy, income, wars or exports does not show a significant association with growth. The association between ODA and child mortality appears to be generally more significant, with a positive sign, than that obtained for economic growth, although the magnitude is relatively modest.