Aid and economic growth: Sensitivity analysis

Abstract

This paper uses panel data from 77 developing countries, two measures of aid, and a dynamic panel data (DPD) estimator to investigate the effects of aid on economic growth. We find that the relationship between income growth and aid is quadratic in nature. We find a negative partial growth effect of aid at low levels of aid but a positive effect when the ratio of aid to gross national income (GNI) reaches a threshold of between 6.6 and 14.4per cent. We find a positive and significant relationship between aid and physical capital investment. Accounting for indirect effects through investment, we find a positive growth effect at all levels of aid. These results are robust to the measurement of aid, the policy environment, income levels and region. Our results differ from much of the earlier research but are consistent with research that calls for increased aid to developing countries.

Can One Promote a Delegation of the Bilateral Aid to Multilateral Donors to Improve Foreign Aid Effect on Economic Growth in ECOWAS (Note 1) Countries?

“…In this regard, Hansen and Tarp (2001) has shown that marginal returns of aid become negative when these flows exceed 25% of GDP, while Lensink and White (2001) has set this threshold around 40%. As for Gyimah-Brempong et al (2012), they found that aid effect on economic growth in 77 developing countries is positive only if the level of aid was between 6.6 and 14.4% of GDP.…”

“…While some studies concluded that aid does not affect or even negatively affects economic growth (Boone, 1994;Easterly, 2003;Easterly, 2008;Gyimah-Brempong et al, 2012;Moyo, 2008), others showed a positive relationship between aid and growth (Arndt et al, 2015;Clemensn et al, 2004;Galiani et al, 2014;Lof et al, 2015) with a decreasing marginal return of aid (Collier & Dollar, 2001;Dalgaard et al, 2004;Durbarry et al, 1998;Hansen & Tarp, 2001). Others else concluded that aid is only effective at supporting positive economic growth when recipient countries adopt good economic policies (Burnside & Dollar, 2000;Burnside & Dollar, 2004;Chauvet & Guillaumont, 2003).…”

Growth, Poverty and Development Assistance: When Does Foreign Aid Work?

“…In terms of convergence, taking the country context first, some studies identify minimum thresholds for aid to be effective (Gyimah-Brempong et al, 2012;Kalyvitis et al, 2012;Wagner, 2014). Other studies identify a maximum threshold level for aid to be effective (Alvi et al, 2008;Clemens et al, 2012;Islam, 2005;Wagner, 2014).…”

“…8. On this model see later studies and reviews (Islam, 2005;Gyimah-Brempong et al, 2012;Wagner, 2008;Feeny and de Silva, 2012;Feeny and McGillivray, 2011). 9.…”

Shedding Light On Policy Coherence for Development: A Conceptual Framework

“…The importance of international development cooperation in the fight against poverty has been studied by many authors (McGillivray et al ., ; De Haan, ; Minoiu and Reddy, ; Alvi and Senbeta, ; Gyimah‐Brempong et al ., ) along with government policies implemented by low‐income and middle‐income countries to reduce their poverty gap (Schneider, ; Alonso, ; Owen et al ., ; Orviska et al ., ). Both policies have been and continue to be crucial for effective poverty reduction in these countries.…”