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Recipient country's 'policies' and the effect of foreign aid on economic growth in developing countries: additional evidence

  • Rati Ram

    (Illinois State University, Normal, IL, USA)

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    This note adds to the research which questions the recent influential view that recipient country's 'policies' play an important role in the effect of foreign aid on economic growth in developing countries. In the first step, the almost universal practice of imposing the constraint of equality on parameters of bilateral and multilateral aid is relaxed and it is shown that 'policy' has no role in the effect of aid even in those cases where the usual constrained models do show such an effect. In addition, many cases are noted where there is no indication of recipient country's policies having any role in the effect of aid on growth even in the usual constrained specifications. These cases employ not merely the Burnside-Dollar 'policy' index, which almost all scholars have used, but also two other broader measures. It is thus concluded that there is little empirical evidence to support the widely-disseminated view that redirecting aid toward countries with 'good' policies leads to more growth and greater poverty reduction in developing countries. Copyright © 2004 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/jid.1071
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    Article provided by John Wiley & Sons, Ltd. in its journal Journal of International Development.

    Volume (Year): 16 (2004)
    Issue (Month): 2 ()
    Pages: 201-211

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    Handle: RePEc:wly:jintdv:v:16:y:2004:i:2:p:201-211
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    1. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
    2. Collier, Paul & Dollar, David, 2001. "Can the World Cut Poverty in Half? How Policy Reform and Effective Aid Can Meet International Development Goals," World Development, Elsevier, vol. 29(11), pages 1787-1802, November.
    3. Hansen, Henrik & Tarp, Finn, 2000. "Aid and Growth Regressions," MPRA Paper 62288, University Library of Munich, Germany.
    4. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
    5. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
    6. Collier, Paul & Dollar, David, 2002. "Aid allocation and poverty reduction," European Economic Review, Elsevier, vol. 46(8), pages 1475-1500, September.
    7. Boone, Peter, 1996. "Politics and the effectiveness of foreign aid," European Economic Review, Elsevier, vol. 40(2), pages 289-329, February.
    8. John Hudson & Paul Mosley, 2001. "Aid policies and growth: in search of the holy grail," Journal of International Development, John Wiley & Sons, Ltd., vol. 13(7), pages 1023-1038.
    9. Rati Ram, 2003. "Roles of Bilateral and Multilateral Aid in Economic Growth of Developing Countries," Kyklos, Wiley Blackwell, vol. 56(1), pages 95-110, February.
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