More Money, More Problems?

Samantha Aw, Louise Gappa, Megan Morris

Abstract


In light of the recent austerity measures of developed countries, the effectiveness of foreign aid on economic growth has been widely debated.  Aid effectiveness has also become increasingly important to the donor community. This study aims to measure the impact of aid on growth in developing countries. We analyze data from 1980-2010 with a set of 98 countries using ordinary least squares estimation.  A more recent data set allows for a more realistic depiction of the current aid situation compared to existing literature.  We control for the macroeconomic policy variables of trade per capita, money supply, and government effectiveness as well as a new institutional variable for technology.  While technology is a growing influence in our world, the literature of aid and growth does not take into account this major factor.  Controlling for technology provides us a more effective measure of aid and growth through increasing explanatory power of our econometric model. Overall, our model indicates a negative relationship between aid and growth until reaching a threshold value of aid per capita of $132.27, at which point aid and growth are positively related.  These results were robust and statistically significant at the 1% level.  This idea of a threshold level of aid is crucial for policymakers to consider when determining the allocation of funds because of donors' desire to invest in more effective amounts of aid.


Keywords


Foreign Aid; Economic Growth;Economic Regression;

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