EVALUATING THE IMPACT OF FOREIGN AID ON ECONOMIC GROWTH: A CROSS-COUNTRY STUDY

Sandrina Moreira

Journal of Economic Development, 2005, vol. 30, issue 2, 25-48

Abstract: One branch of the literature on aid effectiveness attempts to measure the contribution of foreign aid to the growth of developing countries. The micro results are clear and encouraging: foreign aid is beneficial to economic growth. However, until recently, the macro results were inconclusive: the impact of aid on growth was positive, negative, or even non-existent, in statistical terms. This contradiction is known as the ¡°micro-macro paradox¡±. Certain methodological and econometric flaws inherent in the assessments being carried out up to the mid-nineties may provide an explanation for the misleading macro results. Examining a large panel data set, I have found that foreign aid has had a positive impact on economic growth. In light of these findings, I conclude that earlier-generation work is in accordance with the new and recent generation of aid effectiveness studies. Thus, less importance should be attributed to the ¡°micro-macro paradox¡± as an overall appraisal of aid effectiveness. In terms of magnitude, I have also found that aid has less effect on growth in the short-run than in the long-run. I also conclude that the time lags in the aid-growth relationship should not be ignored.

Keywords: Foreign Aid; Economic Growth; Panel Data; Generalised Method of Moments (search for similar items in EconPapers)
JEL-codes: C23 F35 O11 O40 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (40)

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