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Revisiting the aid-growth nexus in light of the Sachs-Easterly debate

Author

Listed:
  • Sarah Lynne S. Daway-Ducanes

    (University of the Philippines)

  • Irene Jo E. Arzadon

    (University of the Philippines)

Abstract

In light of the renewed interest on the aid-growth connection spurred by the recent Sachs-Easterly debates, this note revisits the aid-growth nexus, hypothesizing that aid impacts on growth nonlinearly and that its particular effect conditions on the quality of policies and governance. Using the dynamic panel estimation method, Two-step system generalized method of moments, on more recent data involving an unbalanced panel of 106 countries for the period 1989-2013, we verify some key findings in the aid-growth literature. In particular, aid’s effect on growth is subject to diminishing returns, indicating that there are absorptive capacity constraints that may hinder the effectiveness of aid. However, these absorptive capacity constraints may be relaxed in environments of good governance and policy, enabling aid to have a positive impact on growth.

Suggested Citation

  • Sarah Lynne S. Daway-Ducanes & Irene Jo E. Arzadon, 2019. "Revisiting the aid-growth nexus in light of the Sachs-Easterly debate," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 56(1 and 2), pages 219-235, June and .
    • Handle: RePEc:phs:prejrn:v:56:y:2019:i:1and2:p:219-235
    as

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    File URL: http://pre.econ.upd.edu.ph/index.php/pre/article/view/986/884
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    References listed on IDEAS

    as
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    Keywords

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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O19 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - International Linkages to Development; Role of International Organizations

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