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Growth, Debt Burdens and Alleviating Effects of Foreign Aid in Least Developed Countries

  • Bjerg, Christina

    (Department of Economics, Aarhus School of Business)

  • Bjørnskov, Christian

    ()

    (Department of Economics, Aarhus School of Business)

  • Holm, Anne

    (Department of Economics, Aarhus School of Business)

In this paper, we explore the potential growth effects of foreign aid when in conjunction with severe debt problems. We first argue that aid, when used to finance debt repayments, does not lead to Dutch Disease while still alleviating an economic problem. A set of empirical estimates show that while inflows of foreign aid in general are not associated with growth in a sample of 38 Least Developed Countries, an interaction term with the level of external debt is significant. We take this as suggestive evidence of an alleviating effect of aid in these countries and offer some tentative thoughts on the implications for future aid policies

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Paper provided by University of Aarhus, Aarhus School of Business, Department of Economics in its series Working Papers with number 07-1.

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Length: 31 pages
Date of creation: 01 Jan 2007
Date of revision:
Handle: RePEc:hhs:aareco:2007_001
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  1. Berlage, Lodewijk & Terweduwe, Dirk, 1988. "The classification of countries by cluster and by factor analysis," World Development, Elsevier, vol. 16(12), pages 1527-1545, December.
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  7. Silvia Marchesi & Alessandro Missale, 2007. "How defensive were lending and aid to HIPC?," Working Papers 115, University of Milano-Bicocca, Department of Economics, revised 2007.
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  13. Easterly, William, 2002. "How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief," World Development, Elsevier, vol. 30(10), pages 1677-1696, October.
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  27. Torvik, Ragnar, 2001. "Learning by doing and the Dutch disease," European Economic Review, Elsevier, vol. 45(2), pages 285-306, February.
  28. repec:wbk:wbpubs:12426 is not listed on IDEAS
  29. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
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