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Democratic Reforms, Foreign Aid and Production Inefficiency

  • Christopoulos, Dimitris
  • Siourounis, Gregorios
  • Vlachaki, Irene

We construct an endogenous growth model and we employ empirical analysis to investigate the link between foreign aid and production efficiency in the presence of different political orientations of the recipient country. Using a panel of 124 countries from 1971 to 2007 and the production frontier toolbox, we document that regardless of income stratum, decade and type, foreign aid is associated with higher production inefficiency and that this inefficiency is reduced considerably if countries switch to democratic governance. Our study contributes to the aid literature by pointing to the institutional enhancement of the recipient countries through initially the adoption of democratic ruling practices.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23562.

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Date of creation: Jun 2010
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Handle: RePEc:pra:mprapa:23562
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  1. Raghuram G. Rajan, 2005. "Aid and Growth: What Does The Cross-Country Evidence Really Show?," Working Papers id:54, eSocialSciences.
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  7. Dalgaard, Carl-Johan & Hansen, Henrik & Tarp, Finn, 2002. "On the Empirics of Foreign Aid and Growth," MPRA Paper 63696, University Library of Munich, Germany.
  8. Elias Papaioannou & Gregorios Siourounis, 2008. "Democratisation and Growth," Economic Journal, Royal Economic Society, vol. 118(532), pages 1520-1551, October.
  9. Hristos Doucouliagos & Martin Paldam, 2005. "Aid Effectiveness on Growth. A Meta Study," Economics Working Papers 2005-13, School of Economics and Management, University of Aarhus.
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  17. 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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  19. Dominik H. Enste & Friedrich Schneider, 2000. "Shadow Economies: Size, Causes, and Consequences," Journal of Economic Literature, American Economic Association, vol. 38(1), pages 77-114, March.
  20. Hansen, Henrik & Tarp, Finn, 2000. "Aid and Growth Regressions," MPRA Paper 62288, University Library of Munich, Germany.
  21. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August.
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  23. Wolfgang Keller, 1999. "How Trade Patterns and Technology Flows Affect Productivity Growth," NBER Working Papers 6990, National Bureau of Economic Research, Inc.
  24. Papaioannou, Elias & Siourounis, Gregorios, 2008. "Economic and Social Factors Driving the Third Wave of Democratization," CEPR Discussion Papers 6986, C.E.P.R. Discussion Papers.
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  27. Barro, Robert J, 1996. " Democracy and Growth," Journal of Economic Growth, Springer, vol. 1(1), pages 1-27, March.
  28. Kanbur, Ravi, 2006. "The economics of international aid," Handbook on the Economics of Giving, Reciprocity and Altruism, Elsevier.
  29. David Dollar & Craig Burnside, 2000. "Aid, Policies, and Growth," American Economic Review, American Economic Association, vol. 90(4), pages 847-868, September.
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