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Foreign Aid, Government Policies, and Economic Growth: Further Evidence from Cross-Country Panel Data for 1970-1993

Author

Listed:
  • Lu, Shuang

    (Economics Department, Illinois State University)

  • Ram , Rati

    (Economics Department, Illinois State University,)

Abstract

Six four-year panels for 56 aid-receiving countries, covering the period 1970-1993, are used to judge the effect of foreign aid on economic growth, with a particular focus on the role of aid-receiving countries’ government policies in the effect of aid on growth. The main point made is that the parameter indicating the role of policy in the effectiveness of aid seems highly fragile. If a reasonable augmentation of the models is done by including country-specific intercept dummy variables, policy is observed to have no significant influence on the effect of aid on growth. In some cases, the aid-policy interaction parameter does not show a positive sign even without the country-dummies. Much caution is, therefore, urged in drawing strong conclusions from such estimates about the role of aid-receiving countries’ policies in the effectiveness of aid. Three additional points are noted. First, the aid-parameter has a positive sign in every augmented model (that includes country-specific intercept dummies), but its statistical significance is somewhat mixed. Second, contrary to what one might think, the parameter estimates for several variables become more precise when country-dummies are included. Last, contrast between the estimates from models that do and do not include fixed-effects country-dummies appears methodologically instructive.

Suggested Citation

  • Lu, Shuang & Ram , Rati, 2001. "Foreign Aid, Government Policies, and Economic Growth: Further Evidence from Cross-Country Panel Data for 1970-1993," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 54(1), pages 15-29.
    • Handle: RePEc:ris:ecoint:0223
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    Citations

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    Cited by:

    1. Mark McGillivray, 2003. "Aid Effectiveness and Selectivity: Integrating Multiple Objectives into Aid Allocations," WIDER Working Paper Series DP2003-71, World Institute for Development Economic Research (UNU-WIDER).
    2. Wolf, Susanna, 2002. "EU aid for ACP investment," HWWA Discussion Papers 192, Hamburg Institute of International Economics (HWWA).
    3. Dierk Herzer & Oliver Morrissey, 2009. "The Long-Run Effect of Aid on Domestic Output," Discussion Papers 09/01, University of Nottingham, CREDIT.
    4. Dollar, David & Levin, Victoria, 2006. "The Increasing Selectivity of Foreign Aid, 1984-2003," World Development, Elsevier, vol. 34(12), pages 2034-2046, December.
    5. León-González, Roberto & Montolio, Daniel, 2015. "Endogeneity and panel data in growth regressions: A Bayesian model averaging approach," Journal of Macroeconomics, Elsevier, vol. 46(C), pages 23-39.
    6. Kevin Sylwester, 2008. "Foreign Aid and Urbanization in Developing Countries," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 7(2), pages 153-166, August.
    7. repec:ebl:ecbull:v:15:y:2008:i:14:p:1-14 is not listed on IDEAS
    8. Mark McGillivray, 2003. "Modelling Aid Allocation: Issues, Approaches And Results," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 28(1), pages 171-188, June.
    9. Mark McGillivray & Simon Feeny & Niels Hermes & Robert Lensink, 2005. "It Works; It Doesn't; It Can, But that Depends...: 50 Years of Controversy Over the Macroeconomic Impact of Development Aid," WIDER Working Paper Series RP2005-54, World Institute for Development Economic Research (UNU-WIDER).
    10. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages 191-216, June.
    11. Mark McGillivray, 2005. "Réformer la formule : commentaires.Efficacité de l'aide et régimes de politiques économiques dans les pays receveurs," Revue d’économie du développement, De Boeck Université, vol. 13(2), pages 119-127.
    12. Shaomeng Jia & Claudia R. Williamson, 2019. "Aid, Policies, And Growth: Why So Much Confusion?," Contemporary Economic Policy, Western Economic Association International, vol. 37(4), pages 577-599, October.
    13. Tony Addison & George Mavrotas & Mark McGillivray, 2005. "Development assistance and development finance: evidence and global policy agendas," Journal of International Development, John Wiley & Sons, Ltd., vol. 17(6), pages 819-836.
    14. Mark McGillivray, 2003. "Efficacité de l'aide et sélectivité : vers un concept élargi," Revue d’économie du développement, De Boeck Université, vol. 11(4), pages 43-62.
    15. Tony Addison & George Mavrotas & Mark McGillivray, 2005. "Aid, Debt Relief and New Sources of Finance for Meeting the Millennium Development Goals," WIDER Working Paper Series RP2005-09, World Institute for Development Economic Research (UNU-WIDER).
    16. Nasser Saidi, 2003. "Promesses Chatoyantes, Pietre Performance: Aide Et Cooperation Dans Les Pays Sortant D?un Conflit," Working Papers 0331, Economic Research Forum, revised 10 2003.
    17. Sandrina Berthault Moreira, 2005. "Evaluating The Impact Of Foreign Aid On Economic Growth: A Cross-Country Study," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 30(2), pages 25-48, December.
    18. Wolf, Susanna, 2002. "EU Aid for ACP Investment," Discussion Paper Series 26129, Hamburg Institute of International Economics.
    19. Mark McGillivray, 2006. "Aid Allocation and Fragile States," WIDER Working Paper Series DP2006-01, World Institute for Development Economic Research (UNU-WIDER).
    20. Askarov, Zohid & Doucouliagos, Hristos, 2015. "Development Aid and Growth in Transition Countries," World Development, Elsevier, vol. 66(C), pages 383-399.
    21. Mehmet Eris, 2008. "Foreign aid and growth," Economics Bulletin, AccessEcon, vol. 15(14), pages 1-14.

    More about this item

    JEL classification:

    • F35 - International Economics - - International Finance - - - Foreign Aid
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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