IDEAS home Printed from https://ideas.repec.org/a/taf/oaefxx/v10y2022i1p2062092.html
   My bibliography  Save this article

The relationship between aid and economic growth of developing countries: Does institutional quality and economic freedom matter?

Author

Listed:
  • Chala Amante Abate

Abstract

Foreign aid is an important means of finance for governments of developing countries. The current study investigates whether too much inflow of aid to developing countries is beneficial or harmful to their economy and whether institutional quality and economic freedom matters in aid–growth relationship. To this base, a panel data covering the period 2002–2019 was collected from 44 developing countries of the world. System generalized method of moment was employed to examine the nature of relationship between foreign aid and economic growth, and dynamic panel threshold regression is utilized to uncover the mediating role of institutional quality and economic freedom. The result thus obtained reveals that the relationship between foreign aid and economic growth takes inverted U shape indicating the existence of optimal level of aid equal to 9.7% of GNI. The result from dynamic panel threshold regression shows that the effect of aid on economic growth is negative when arithmetic mean of institutional quality index is less than or equal to −0.614 and the overall index of economic freedom is less than or equal to 60.521. Above the indicated thresholds, the effect of aid on economic growth is positive which means institutional quality and economic freedom matters in aid–growth relationship. Drawing on the results obtained, the study suggest that developing countries should not receive huge amount of aid from donors, reform their institutions for the better, and improve economic freedom if they want to reap the benefit of aid.

Suggested Citation

  • Chala Amante Abate, 2022. "The relationship between aid and economic growth of developing countries: Does institutional quality and economic freedom matter?," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2062092-206, December.
    • Handle: RePEc:taf:oaefxx:v:10:y:2022:i:1:p:2062092
    DOI: 10.1080/23322039.2022.2062092
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/23322039.2022.2062092
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/23322039.2022.2062092?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Wasiu Adamson, Temitope & Adebayo Ajisafe, Rufus & Omobolanle Yussuff, Rukayat, 2022. "Inclusive Growth In Sub-Saharan Africa: Does Sectoral Foreign Aid Matter?," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 9(2), pages 97-128, June.
    2. Akame, Afuge & Mavrotas, George, 2024. "The differential effects of foreign aid to sub-Saharan Africa," IOB Discussion Papers 2024.01, Universiteit Antwerpen, Institute of Development Policy (IOB).
    3. repec:iob:dpaper:2024.01 is not listed on IDEAS
    4. Bakari, Sayef, 2023. "The nexus between domestic investment and economic growth in MENA countries; Does unemployment matter?," MPRA Paper 118349, University Library of Munich, Germany.
    5. Haldar, Anasuya & Sethi, Narayan, 2022. "Effect of sectoral foreign aid allocation on growth and structural transformation in sub-Saharan Africa—Analysing the roles of institutional quality and human capital," Economic Analysis and Policy, Elsevier, vol. 76(C), pages 1010-1026.
    6. Pradhan, Rudra P. & Bennett, Sara E. & Nair, Mahendhiran S. & Arvin, Mak B., 2023. "Does foreign aid procurement in resource-rich countries depend on these countries’ financial development and institutional quality? Evidence from PVECM and quantile-on-quantile regression," Socio-Economic Planning Sciences, Elsevier, vol. 88(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:oaefxx:v:10:y:2022:i:1:p:2062092. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/OAEF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.