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Foreign Aid, Government Policies, and Economic Growth: Further Evidence from Cross-Country Panel Data for 1970-1993


  • Lu, Shuang

    (Economics Department, Illinois State University)

  • Ram , Rati

    () (Economics Department, Illinois State University,)


Six four-year panels for 56 aid-receiving countries, covering the period 1970-1993, are used to judge the effect of foreign aid on economic growth, with a particular focus on the role of aid-receiving countries’ government policies in the effect of aid on growth. The main point made is that the parameter indicating the role of policy in the effectiveness of aid seems highly fragile. If a reasonable augmentation of the models is done by including country-specific intercept dummy variables, policy is observed to have no significant influence on the effect of aid on growth. In some cases, the aid-policy interaction parameter does not show a positive sign even without the country-dummies. Much caution is, therefore, urged in drawing strong conclusions from such estimates about the role of aid-receiving countries’ policies in the effectiveness of aid. Three additional points are noted. First, the aid-parameter has a positive sign in every augmented model (that includes country-specific intercept dummies), but its statistical significance is somewhat mixed. Second, contrary to what one might think, the parameter estimates for several variables become more precise when country-dummies are included. Last, contrast between the estimates from models that do and do not include fixed-effects country-dummies appears methodologically instructive.

Suggested Citation

  • Lu, Shuang & Ram , Rati, 2001. "Foreign Aid, Government Policies, and Economic Growth: Further Evidence from Cross-Country Panel Data for 1970-1993," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 54(1), pages 15-29.
  • Handle: RePEc:ris:ecoint:0223

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    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Nasser Saidi, 2003. "Promesses Chatoyantes, Pietre Performance: Aide Et Cooperation Dans Les Pays Sortant D?un Conflit," Working Papers 0331, Economic Research Forum, revised 10 2003.
    2. Dierk Herzer & Oliver Morrissey, "undated". "The Long-Run Effect of Aid on Domestic Output," Discussion Papers 09/01, University of Nottingham, CREDIT.
    3. Dollar, David & Levin, Victoria, 2006. "The Increasing Selectivity of Foreign Aid, 1984-2003," World Development, Elsevier, vol. 34(12), pages 2034-2046, December.
    4. 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.
    5. León-González, Roberto & Montolio, Daniel, 2015. "Endogeneity and panel data in growth regressions: A Bayesian model averaging approach," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 23-39.
    6. Askarov, Zohid & Doucouliagos, Hristos, 2015. "Development Aid and Growth in Transition Countries," World Development, Elsevier, vol. 66(C), pages 383-399.
    7. Mehmet Eris, 2008. "Foreign aid and growth," Economics Bulletin, AccessEcon, vol. 15(14), pages 1-14.

    More about this item

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General


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