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Evaluating The Impact Of Foreign Aid On Economic Growth: A Cross-Country Study

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  • Sandrina Berthault Moreira

    () (College of Business Administration Setubal Polytechnic)

Abstract

One branch of the literature on aid effectiveness attempts to measure the contribution of foreign aid to the growth of developing countries. The micro results are clear and encouraging: foreign aid is beneficial to economic growth. However, until recently, the macro results were inconclusive: the impact of aid on growth was positive, negative, or even non-existent, in statistical terms. This contradiction is known as the ¡°micro-macro paradox¡±. Certain methodological and econometric flaws inherent in the assessments being carried out up to the mid-nineties may provide an explanation for the misleading macro results. Examining a large panel data set, I have found that foreign aid has had a positive impact on economic growth. In light of these findings, I conclude that earlier-generation work is in accordance with the new and recent generation of aid effectiveness studies. Thus, less importance should be attributed to the ¡°micro-macro paradox¡± as an overall appraisal of aid effectiveness. In terms of magnitude, I have also found that aid has less effect on growth in the short-run than in the long-run. I also conclude that the time lags in the aid-growth relationship should not be ignored.

Suggested Citation

  • Sandrina Berthault Moreira, 2005. "Evaluating The Impact Of Foreign Aid On Economic Growth: A Cross-Country Study," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 30(2), pages 25-48, December.
  • Handle: RePEc:jed:journl:v:30:y:2005:i:2:p:25-48
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    File URL: http://www.jed.or.kr/full-text/30-2/J02_702.PDF
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    References listed on IDEAS

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    1. Mosley, Paul & Hudson, John & Horrell, Sara, 1987. "Aid, the Public Sector and the Market in Less Developed Countries," Economic Journal, Royal Economic Society, vol. 97(387), pages 616-641, September.
    2. Lisa CHAUVET & Patrick GUILLAUMONT, 2003. "Aid and Growth Revisited: Policy, Economic Vulnerability and Political Instability," Working Papers 200327, CERDI.
    3. Finn Tarp, 2006. "Aid and Development," Discussion Papers 06-12, University of Copenhagen. Department of Economics.
    4. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
    5. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    6. R. Lensink & H. White, 2001. "Are There Negative Returns to Aid?," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 42-65.
    7. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages 191-216, June.
    8. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
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    Citations

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    Cited by:

    1. Yousuf, Ahmed Sadek, 2012. "Assessing Impact of Health Oriented Aid on Infant Mortality Rates," EconStor Preprints 67391, ZBW - German National Library of Economics.
    2. Tiwari Aviral Kumar, 2011. "Foreign Aid, FDI, Economic Freedom and Economic Growth in Asian Countries," Global Economy Journal, De Gruyter, vol. 11(3), pages 1-28, September.
    3. Heng Hokmeng & Pahlaj Moolio, 2015. "The Impact of Foreign Aid on Economic Growth in Cambodia: A Co-integration Approach," KASBIT Business Journals, Khadim Ali Shah Bukhari Institute of Technology (KASBIT), vol. 8(1), pages 4-25, May.
    4. repec:ibn:ijefaa:v:9:y:2017:i:5:p:87-93 is not listed on IDEAS
    5. Feeny, Simon & Fry, Tim R.L., 2014. "How sustainable is the macroeconomic impact of foreign aid?," Journal of Policy Modeling, Elsevier, vol. 36(6), pages 1066-1081.
    6. Kwabena Gyimah-Brempong & Jeffrey S. Racine, 2014. "Aid and Economic Growth: A Robust Approach," Journal of African Development, African Finance and Economic Association, vol. 16(1), pages 1-35.
    7. Yousuf, Ahmed Sadek, 2012. "Impact of Health Aid on Infant Mortality Rate," MPRA Paper 42945, University Library of Munich, Germany, revised 12 Oct 2012.
    8. Michal Chervin & Sweder van Wijnbergen, 2010. "Economic Growth and the Volatility of Foreign Aid," Tinbergen Institute Discussion Papers 10-002/2, Tinbergen Institute.
    9. Wamboye, Evelyn, 2012. "Quantity or quality? foreign aid implications on economic growth in least developed countries," MPRA Paper 39518, University Library of Munich, Germany.
    10. repec:eco:journ1:2017-03-95 is not listed on IDEAS
    11. 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.
    12. Wamboye, Evelyn & Adekola, Abel, 2013. "Foreign Aid, Legal Origin, Economic Growth and Africa’s Least Developed Countries," MPRA Paper 47846, University Library of Munich, Germany.

    More about this item

    Keywords

    Foreign Aid; Economic Growth; Panel Data; Generalised Method of Moments;

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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