Does foreign aid stimulate economic growth in developing countries? Further evidence in both aggregate and disaggregated samples

This paper analyzes the impact of foreign aid on economic growth in developing countries. Through both fixed-effects and robust least squares estimators, we study the cross-section time-series data for a group of 37 developing countries consisting of low income, lower middle income, and upper middle-income groups over the period from 1985 to 2018. Empirical results reveal that foreign aid tends to increase economic growth in the overall sample, while we identify mixed effects when we disaggregate the sample into different income groups. The empirical results also suggest that in low-income countries, exports contribute to economic growth, but the role played by foreign aid or foreign direct investment is very limited. For lower middle-income countries, their economic growth benefits from foreign aid and foreign direct investment. For upper middle-income countries, foreign direct investment contributes to their economic growth, but foreign aid does not produce a positive effect on economic growth.