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Foreign Aid: Good for Investment, Bad for Productivity

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  • Eskander Alvi
  • Aberra Senbeta

Abstract

This paper examines the effects of aid on sources of growth: capital accumulation and total factor productivity (TFP) growth; the latter captures the effect on growth after removing the contribution of factor accumulation. Given the role of TFP in explaining cross-country differences in income levels and growth rates, the productivity effect can play a significant role in explaining the impact of aid on growth. Contradictory effects of aid were found: aid boosts investment but adversely affects TFP, suggesting that efficiency losses may undermine the overall effects of aid on growth. It was also found that aid reduces the efficacy of financial institutions in supporting productivity growth, a surprising result that possibly illuminates the nature of aid distribution in receiving countries.

Suggested Citation

  • Eskander Alvi & Aberra Senbeta, 2012. "Foreign Aid: Good for Investment, Bad for Productivity," Oxford Development Studies, Taylor & Francis Journals, vol. 40(2), pages 139-161, June.
    • Handle: RePEc:taf:oxdevs:v:40:y:2012:i:2:p:139-161
    DOI: 10.1080/13600818.2012.675053
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    3. Felicitas Nowak-Lehmann D. & Elena Gross, 2015. "What effect does development aid have on productivity in recipient countries? An analysis using quantiles and thresholds," Ibero America Institute for Econ. Research (IAI) Discussion Papers 232, Ibero-America Institute for Economic Research.
    4. Miao Miao & Jiang Yushi & Dinkneh Gebre Borojo, 2020. "The Impacts of China–Africa Economic Relation on Factor Productivity of African Countries," Economies, MDPI, vol. 8(2), pages 1-30, June.
    5. Asiedu, Edward & Sadekla, Sylvester S. & Bokpin, Godfred A., 2020. "Aid to Africa’s agriculture towards building physical capital: Empirical evidence and implications for post-COVID-19 food insecurity," World Development Perspectives, Elsevier, vol. 20(C).
    6. Elena Groß & Felicitas Nowak‐Lehmann Danzinger, 2022. "What effect does development aid have on productivity in recipient countries?," Review of Development Economics, Wiley Blackwell, vol. 26(3), pages 1438-1465, August.

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