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Government Policy and the Effectiveness of Foreign Aid

Robert Murphy () and Nicholas Tresp
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Nicholas Tresp: UBS Investment Bank

No 647, Boston College Working Papers in Economics from Boston College Department of Economics

Abstract: This paper reconsiders the role of economic policy in determining the effectiveness of foreign aid for generating economic growth in developing countries. We update and modify the data set originally used by Burnside and Dollar (2000) in order to more fully consider the critique presented by Easterly et al. (2004). Our findings suggest that the relationship among foreign aid, government policy, and economic growth is tenuous and depends importantly on the subset of countries included in the analysis. Good policy enhances the effectiveness of foreign aid in spurring growth when we use the original set of countries included in Burnside and Dollar, but this relationship disappears for an expanded set of countries. Because the relationship among aid, policy, and growth is likely to be nonlinear, we present an alternative probit model emphasizing growth thresholds. Our results from this alternative analysis confirm the conclusions of Easterly et al., finding little support for the view that good policy increases the probability that foreign aid contributes to growth.

Keywords: foreign aid; economic development; economic growth; government policy; development assistance (search for similar items in EconPapers)
JEL-codes: F43 O11 O23 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2006-08-09, Revised 2006-08-29
New Economics Papers: this item is included in nep-afr and nep-fdg
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