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

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  • 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)

Abstract

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

Suggested Citation

  • Bjerg, Christina & Bjørnskov, Christian & Holm, Anne, 2007. "Growth, Debt Burdens and Alleviating Effects of Foreign Aid in Least Developed Countries," Working Papers 07-1, University of Aarhus, Aarhus School of Business, Department of Economics.
  • Handle: RePEc:hhs:aareco:2007_001
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    Cited by:

    1. Freytag , Andreas & Pettersson, Jonatan & Schmied, Julian, 2016. "Debt Relief and Good Governance: New Evidence," VfS Annual Conference 2016 (Augsburg): Demographic Change 145914, Verein für Socialpolitik / German Economic Association.
    2. Bjørnskov, Christian & Schröder, Philipp J.H., 2013. "Are debt repayment incentives undermined by foreign aid?," Journal of Comparative Economics, Elsevier, vol. 41(4), pages 1073-1091.
    3. Raschky, Paul A. & Schwindt, Manijeh, 2012. "On the channel and type of aid: The case of international disaster assistance," European Journal of Political Economy, Elsevier, vol. 28(1), pages 119-131.
    4. Fahmida Khatun & Syed Yusuf Saadat & Md. Kamruzzaman, 2019. "FINANCE FOR SDGs: Addressing Governance Challenge of Aid Utilisation in Bangladesh," CPD Working Paper 125, Centre for Policy Dialogue (CPD).
    5. Felicitas Nowak‐Lehmann & Axel Dreher & Dierk Herzer & Stephan Klasen & Inmaculada Martínez‐Zarzoso, 2012. "Does foreign aid really raise per capita income? A time series perspective," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 45(1), pages 288-313, February.
    6. Winston Moore & Chrystol Thomas, 2010. "A meta-analysis of the relationship between debt and growth," International Journal of Development Issues, Emerald Group Publishing, vol. 9(3), pages 214-225, September.
    7. Andreas FREYTAG & Julian SCHMIED, 2019. "Debt Relief And Good Governance: New Evidence Of Developing Countries For The Period 1990-2013," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 19(1), pages 15-32.
    8. Lis, Piotr, 2018. "The impact of armed conflict and terrorism on foreign aid: A sector-level analysis," World Development, Elsevier, vol. 110(C), pages 283-294.
    9. Boateng, Elliot & Agbola, Frank W. & Mahmood, Amir, 2021. "Foreign aid volatility and economic growth in Sub-Saharan Africa: Does institutional quality matter?," Economic Modelling, Elsevier, vol. 96(C), pages 111-127.
    10. Justesen, Mogens K., 2012. "Democracy, dictatorship, and disease: Political regimes and HIV/AIDS," European Journal of Political Economy, Elsevier, vol. 28(3), pages 373-389.
    11. Young, Andrew T. & Sheehan, Kathleen M., 2014. "Foreign aid, institutional quality, and growth," European Journal of Political Economy, Elsevier, vol. 36(C), pages 195-208.
    12. Doucouliagos, Hristos & Paldam, Martin, 2011. "The ineffectiveness of development aid on growth: An update," European Journal of Political Economy, Elsevier, vol. 27(2), pages 399-404, June.

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    More about this item

    Keywords

    Economic growth; foreign aid; external debt;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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