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An Empirical Analysis of the Effect of Aid on Growth

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  • Abdiweli Ali
  • Hodan Isse

Abstract

The fact that so many countries register low per capita income after receiving enormous amounts of foreign aid questions its effectiveness as a tool for economic growth and consequently as an instrument of poverty alleviation. The impact of foreign aid on economic growth is ultimately an empirical question and one that will be addressed in this paper. The paper uses the most recent data and incorporates most of the salient features of the new growth literature to test the effect of aid on economic growth. Three important conclusions emerged from the empirical analysis of the paper. First, it shows that the effect of aid on growth is nonlinear. The nonlinearity of the relationship indicates a threshold for foreign aid beyond which more aid is detrimental to economic growth. Second, the empirical results of this paper support Burnside and Dollar’s findings that a good policy environment is important for aid to work effectively. Aid effectiveness can only be sustained in an environment of good economic policy. Finally, using etholinguistic fractionalization as an instrument, the empirical results of the paper indicate that the relationship between AID/GDP and economic growth is sequential. More and more aid leads to lower economic growth. Copyright International Atlantic Economic Society 2005

Suggested Citation

  • Abdiweli Ali & Hodan Isse, 2005. "An Empirical Analysis of the Effect of Aid on Growth," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 11(1), pages 1-11, February.
    • Handle: RePEc:kap:iaecre:v:11:y:2005:i:1:p:1-11:10.1007/s11294-004-7177-6
    DOI: 10.1007/s11294-004-7177-6
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    Cited by:

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    2. Ismahene Yahyaoui & Najeh Bouchoucha, 2021. "The long‐run relationship between ODA, growth and governance: An application of FMOLS and DOLS approaches," African Development Review, African Development Bank, vol. 33(1), pages 38-54, March.
    3. Suleiman Malik Faki & Prof. Fuzhong Chen, 2021. "Does Foreign Aid Influence Corruption? New Evidence in East Africa Community Member Countries," International Journal of Science and Business, IJSAB International, vol. 5(4), pages 46-58.
    4. Martinez, Pablo, 2015. "The impact of foreign aid on economic growth," MPRA Paper 66588, University Library of Munich, Germany.
    5. Alina Georgeta AILINCA, 2021. "Conceiving A Composite Evaluation For Official Development Assistance In Supporting Sustainable Development Goals And Economic Growth," Contemporary Economy Journal, Constantin Brancoveanu University, vol. 6(3), pages 66-74.
    6. Lessmann, Christian & Markwardt, Gunther, 2012. "Aid, Growth and Devolution," World Development, Elsevier, vol. 40(9), pages 1723-1749.
    7. Md Ismail Hossain & Md Istiak Hossain & Mollah Aminul Islam & Md Reza Sultanuzzaman, 2022. "Does Foreign Aid Have an Expected Role in the Economic Growth of Bangladesh? An Analysis in ARDL Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 12(6), pages 113-126, November.
    8. Yongzheng Yang & Hong Chen & Shiu raj Singh & Baljeet Singh, 2013. "The Pacific Speed of Growth: How Fast Can It Be and What Determines It?," IMF Working Papers 2013/104, International Monetary Fund.
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    Keywords

    H11; O40;

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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