New evidence on the impact of foreign aid on economic growth

Abstract

Foreign aid inflows have grown significantly in the post-war period.Many studies have tried to assess the effectiveness of aid at the micro-and macro-level.While microevaluations have found that in most cases aid 'works', those at the macro-level are ambiguous.This paper assesses the impact of foreign aid on growth for a large sample of developing countries.We use an augmented Fischer-Easterly type model and estimate this using both cross-section and panel data techniques.The results strongly support the view that foreign aid does have some positive impact on growth, conditional on a stable macroeconomic policy environment.We also find that these results vary according to income level, levels of aid allocation and geographical location. Outlineavailability of data or when the country has less than 10 observations for the fiscal variable over the period 1970-93.Omitted countries are: Algeria, Benin, Central African Republic, Congo, Cote D'Ivoire, Egypt, Mali, Niger, Oman and Senegal.In the remaining sample of 58 countries there are 19 Latin American and Caribbean countries and 22 Sub-Saharan African countries.