Aid, Policies, and Growth

TLDR

Good policies are essential for growth. The study examines how foreign aid, economic policies, and per capita GDP growth are interrelated. The authors analyze a new foreign aid database to assess the relationships among aid, policies, and GDP growth. Aid boosts growth in developing countries only when fiscal, monetary, and trade policies are sound, and its effectiveness is limited when policies are poor; policy quality minimally influences aid allocation, suggesting systematic policy conditioning could improve aid impact. JEL codes: F350, O230, O400.

Abstract

This paper uses a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth of per capita GDP. We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies. Good policies are ones that are themselves important for growth. The quality of policy has only a small impact on the allocation of aid. Our results suggest that aid would be more effective if it were more systematically conditioned on good policy. (JEL F350, O230, O400)