Abstract
Using data on 71 aid recipient countries over the period 2000–2019, this study examines the effect of the size and composition of foreign aid (Official Development Assistance, ODA) on economic growth. The size of ODA is positively correlated with growth, and the impact of an increase in ODA on growth decreases when ODA reaches a certain level. The influence of the composition of ODA in terms of grants and loans on growth is estimated differently depending on sample selection. The sample is divided into two sub-samples based on the median of the corruption perception index. The regression results show that grants have a positive and significant impact on growth without sample selection. However, loans have a positive and significant impact on growth in the sub-sample of less corrupt countries, but a negative and significant impact on growth in the sub-sample of more corrupt countries. Therefore, the results suggest that ODA is useful for inducing growth in the early stages of development. However, improvement in the economic environment in terms of reduced corruption is required to increase the positive impact of ODA in the form of loans on growth.
Countries in the sample.
Relatively more corrupt countries | Relatively less corrupt countries | ||||
---|---|---|---|---|---|
No. | Country | CPI | No. | Country | CPI |
1 | Sudan | 16 | 1 | Albania | 35 |
2 | Guinea-Bissau | 18 | 2 | Brazil | 35 |
3 | Haiti | 18 | 3 | Cote d’Ivoire | 35 |
4 | Cambodia | 20 | 4 | Egypt, Arab Rep. | 35 |
5 | Nicaragua | 22 | 5 | Mongolia | 35 |
6 | Madagascar | 24 | 6 | North Macedonia | 35 |
7 | Cameroon | 25 | 7 | Bosnia and Herzegovina | 36 |
8 | Tajikistan | 25 | 8 | Panama | 36 |
9 | Bangladesh | 26 | 9 | Peru | 36 |
10 | Guatemala | 26 | 10 | Thailand | 36 |
11 | Honduras | 26 | 11 | Colombia | 37 |
12 | Mozambique | 26 | 12 | Gambia, The | 37 |
13 | Nigeria | 26 | 13 | Tanzania | 37 |
14 | Dominican Republic | 28 | 14 | Vietnam | 37 |
15 | Kenya | 28 | 15 | Ecuador | 38 |
16 | Lebanon | 28 | 16 | Sri Lanka | 38 |
17 | Paraguay | 28 | 17 | Turkey | 39 |
18 | Uganda | 28 | 18 | Burkina Faso | 40 |
19 | Guinea | 29 | 19 | Indonesia | 40 |
20 | Mali | 29 | 20 | Benin | 41 |
21 | Mexico | 29 | 21 | China | 41 |
22 | Togo | 29 | 22 | Ghana | 41 |
23 | Azerbaijan | 30 | 23 | India | 41 |
24 | Kyrgyz Republic | 30 | 24 | Morocco | 41 |
25 | Bolivia | 31 | 25 | Armenia | 42 |
26 | Gabon | 31 | 26 | Solomon Islands | 42 |
27 | Moldova | 32 | 27 | Jamaica | 43 |
28 | Niger | 32 | 28 | Tunisia | 43 |
29 | Pakistan | 32 | 29 | South Africa | 44 |
30 | Sierra Leone | 33 | 30 | Argentina | 45 |
31 | El Salvador | 34 | 31 | Senegal | 45 |
32 | Eswatini | 34 | 32 | Jordan | 48 |
33 | Nepal | 34 | 33 | Mauritius | 52 |
34 | Philippines | 34 | 34 | Namibia | 52 |
35 | Malaysia | 53 | |||
36 | Costa Rica | 56 | |||
37 | Georgia | 56 |
-
Note: Aid recipient countries are divided into two sub-samples based on the median of Corruption Perception Index (CPI) in 2019.
References
Adedokun, A.J. (2017). Foreign aid, governance and economic growth in Sub-Saharan Africa: does one cap fit all? Afr. Dev. Rev. 29: 184–196, https://doi.org/10.1111/1467-8268.12249.Search in Google Scholar
Akramov, K.T. (2012). Foreign aid allocation, governance, and economic growth. University of Pennsylvania Press, Philadelphia.10.9783/9780812207736Search in Google Scholar
Alesina, A. and Weder, B. (2002). Do corrupt governments receive less foreign aid? Am. Econ. Rev. 92: 1126–1137, https://doi.org/10.1257/00028280260344669.Search in Google Scholar
Arellano, M. and Bover, O. (1995). Another look at the instrumental variable estimation of error-components model. J. Econom. 68: 29–51, https://doi.org/10.1016/0304-4076(94)01642-d.Search in Google Scholar
Arndt, C., Jones, S., and Tarp, F. (2015). Assessing foreign aid’s long-run contribution to growth and development. World Dev. 69: 6–18, https://doi.org/10.1016/j.worlddev.2013.12.016.Search in Google Scholar
Bacha, E.L. (1990). A three-gap model of foreign transfers and the GDP growth rate in developing countries. J. Dev. Econ. 32: 279–296, https://doi.org/10.1016/0304-3878(90)90039-e.Search in Google Scholar
Bandyopadhyay, S., Lahiri, S., and Younas, J. (2013). Financing growth: foreign aid versus foreign loans. In: Working papers 2013-031. Federal Reserve Bank of St. Louis, St. Louis.10.2139/ssrn.2343757Search in Google Scholar
Birdsall, N., Rodrik, D., and Subramanian, A. (2005). How to help poor countries. Foreign Aff. 84: 136–152, https://doi.org/10.2307/20034426.Search in Google Scholar
Blundell, R. and Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. J. Econom. 87: 115–143, https://doi.org/10.1016/s0304-4076(98)00009-8.Search in Google Scholar
Boone, P. (1994). The impact of foreign aid on savings and growth. In: Centre for economic performance, working paper no. 677. London School of Economics and Political Science, London.Search in Google Scholar
Brazys, S. (2016). Aid and governance: negative returns? Eur. J. Dev. Res. 28: 294–313, https://doi.org/10.1057/ejdr.2014.77.Search in Google Scholar
Brückner, M. (2013). On the simultaneity problem in the aid and growth debate. J. Appl. Econom. 28: 126–150, https://doi.org/10.1002/jae.1259.Search in Google Scholar
Burnside, C. and Dollar, D. (2000). Aid, policies, and growth. Am. Econ. Rev. 90: 847–868, https://doi.org/10.1257/aer.90.4.847.Search in Google Scholar
Chakravarti, A. (2005). Aid, institutions and development: new approaches to growth, governance and poverty. Edward Elgar Publishing, Cheltenham, UK.10.4337/9781845425524Search in Google Scholar
Chenery, H.B. and Strout, A.M. (1966). Foreign assistance and economic development. Am. Econ. Rev. 56: 679–733.Search in Google Scholar
Clemens, M.A., Radelet, S., Bhavnani, R.B., and Bazzi, S. (2012). Counting chickens when they hatch: timing and the effects of aid on growth. Econ. J. 122: 590–617, https://doi.org/10.1111/j.1468-0297.2011.02482.x.Search in Google Scholar
Cordella, T. and Ulku, H. (2007). Grants versus loans. IMF Staff Pap. 54: 139–162, https://doi.org/10.1057/palgrave.imfsp.9450002.Search in Google Scholar
Dollar, D. and Levin, V. (2006). The increasing selectivity of foreign aid, 1984–2003. World Dev. 34: 2034–2046, https://doi.org/10.1016/j.worlddev.2006.06.002.Search in Google Scholar
Easterly, W. (2003). Can foreign aid buy growth? J. Econ. Perspect. 17: 23–48, https://doi.org/10.1257/089533003769204344.Search in Google Scholar
Easterly, W., Levine, R., and Roodman, D. (2004). Aid, policies, and growth: comment. Am. Econ. Rev. 94: 774–780, https://doi.org/10.1257/0002828041464560.Search in Google Scholar
Fayissa, B. and El-Kaissy, M.I. (1999). Foreign aid and the economic growth of developing countries (LDCs): further evidence. Stud. Comp. Int. Dev. 34: 37–50, https://doi.org/10.1007/bf02687626.Search in Google Scholar
Hansen, H. and Tarp, F. (2000). Aid effectiveness disputed. J. Int. Dev. 12: 375–398, https://doi.org/10.1002/(sici)1099-1328(200004)12:3<375::aid-jid657>3.0.co;2-m.10.1002/(SICI)1099-1328(200004)12:3<375::AID-JID657>3.0.CO;2-MSearch in Google Scholar
Hoebink, P. (2006). European donors and ‘good governance’: condition or goal? Eur. J. Dev. Res. 18: 131–161, https://doi.org/10.1080/09578810600576768.Search in Google Scholar
Javid, M. and Qayyum, A. (2010). Foreign aid and growth nexus in Pakistan: the role of macroeconomic policies. Econ. Bull. 30: 1–31.Search in Google Scholar
Kalu, K.N. (2012). Liberal economics, governance, and official development assistance: empirical comments on theoretical themes. Afr. Soc. Sci. Rev. 5: 47–65.Search in Google Scholar
Kaya, I. and Kaya, O. (2020). Foreign aid, institutional quality and government fiscal behavior in emerging economies: an empirical investigation. Q. Rev. Econ. Finance 76: 59–67, https://doi.org/10.1016/j.qref.2019.08.004.Search in Google Scholar
Knack, S. (2001). Aid dependence and the quality of governance: cross-country empirical tests. South. Econ. J. 68: 310–329, https://doi.org/10.2307/1061596.Search in Google Scholar
Kosack, S. (2003). Effective aid: how democracy allows development aid to improve the quality of life. World Dev. 31: 1–22, https://doi.org/10.1016/s0305-750x(02)00177-8.Search in Google Scholar
Lensink, R. and White, H. (2000). Aid allocation, poverty reduction and the assessing aid report. J. Int. Dev. 12: 399–412, https://doi.org/10.1002/(sici)1099-1328(200004)12:3<399::aid-jid658>3.0.co;2-5.10.1002/(SICI)1099-1328(200004)12:3<399::AID-JID658>3.0.CO;2-5Search in Google Scholar
Mah, J.S. and Yoon, S.-C. (2019). The effect of grants and loans on the economic growth of Asian countries. J. Int. Trade Commer. 15: 1–18, https://doi.org/10.16980/jitc.15.6.201912.1.Search in Google Scholar
Mah, J.S. and Yoon, S.-C. (2020). The effects of grants and loans on economic growth in Sub-Saharan Africa: considering different types of income level. J. Int. Trade Econ. Dev. 29: 604–618, https://doi.org/10.1080/09638199.2019.1708962.Search in Google Scholar
Mahembe, E. and Odhiambo, N.M. (2021). Does foreign aid reduce poverty? A dynamic panel data analysis for Sub-Saharan African countries. J. Econ. Inequal. 19: 875–893, https://doi.org/10.1007/s10888-021-09496-5.Search in Google Scholar
Moyo, D. (2009). Dead aid: why aid makes things worse and how there is another way for Africa. Penguin, London.Search in Google Scholar
OECD, https://stats.oecd.org/qwids/.Search in Google Scholar
Ouedraogo, R., Sourouema, W.S., and Sawadogo, H. (2021). Aid, growth and institutions in Sub-Saharan Africa: new insights using a multiple growth regime approach. World Econ. 44: 107–142, https://doi.org/10.1111/twec.12968.Search in Google Scholar
Papanek, G.F. (1973). Aid, foreign private investment, savings, and growth in less developed countries. J. Polit. Econ. 81: 120–130, https://doi.org/10.1086/260009.Search in Google Scholar
Qayyum, U., Din, M., and Haider, A. (2014). Foreign aid, external debt and governance. Econ. Modell. 37: 41–52, https://doi.org/10.1016/j.econmod.2013.08.045.Search in Google Scholar
Rajan, R.G. and Subramanian, A. (2008). Aid and growth: what does the cross-country evidence really show? Rev. Econ. Stat. 90: 643–665, https://doi.org/10.1162/rest.90.4.643.Search in Google Scholar
Salam, R. and Hwang, J. (2021). The effect of foreign aid on governance in developing countries. J. Global Bus. Trade 17: 27–37, https://doi.org/10.20294/jgbt.2021.17.1.27.Search in Google Scholar
Senadza, B., Fiagbe, K., and Quartey, P. (2018). The effect of external debt on economic growth in Sub-Saharan Africa. Int. J. Bus. Econ. Sci. Appl. Res. 11: 61–69.Search in Google Scholar
Svensson, J. (2000). Foreign aid and rent-seeking. J. Int. Econ. 51: 437–461, https://doi.org/10.1016/s0022-1996(99)00014-8.Search in Google Scholar
Tezanos, S., Quiñones, A., and Guijarro, M. (2013). Inequality, aid and growth: macroeconomic impact of aid grants and loans in Latin America and the Caribbean. J. Appl. Econ. 16: 153–177, https://doi.org/10.1016/s1514-0326(13)60007-0.Search in Google Scholar
Transparency International, https://www.transparency.org.Search in Google Scholar
World Bank, https://databank.worldbank.org.Search in Google Scholar
© 2023 Walter de Gruyter GmbH, Berlin/Boston
Articles in the same Issue
- Frontmatter
- Research Articles
- Domestic Violence, Labor Market, and Minimum Wage: Theory and Evidence
- Breaking Bad: A Disaggregated Analysis of Inflation Inertia
- Aid–Growth Nexus and Corruption
- Survey
- Disparities in Female Labour Force Participation in South Asia and Latin America: A Review
Articles in the same Issue
- Frontmatter
- Research Articles
- Domestic Violence, Labor Market, and Minimum Wage: Theory and Evidence
- Breaking Bad: A Disaggregated Analysis of Inflation Inertia
- Aid–Growth Nexus and Corruption
- Survey
- Disparities in Female Labour Force Participation in South Asia and Latin America: A Review