Foreign Aid and Economic Growth in the Developing Countries - a Cross-Country Empirical Analysis
ABSTRACT OF THE THESIS
Using cross-country data, I examine how foreign aid affects economic growth in developing countries over the period from 1975 to 2000. I find evidence that foreign aid significantly and negatively correlates with growth in developing countries. However, foreign aid to inland countries as well as to South Asian countries during the period of 1992-2000 is found to have a positive impact on growth. In addition, a strong divergence trend is found among countries in the data set.
The results suggest that (i) there may be problems in the present aid providing system, where aid hinders growth of developing countries (ii) the successful experience of some inland countries and South Asian nations during the period of 1992-2000 could be a good lesson for other developing countries. Finally, a strong evidence of divergence implies that if the condition is not improved in the least developing countries, there would be a large income dispersion among developing countries in the future.
Chapter I
Introduction
1.1. Background
Foreign aid is usually associated with official development assistance, which in turn is a subset of the official development finance, and normally targeted to the poorest countries (World Bank,1998).
How does foreign aid affect the economic growth of developing countries? This is a question which has drawn the attention of many scholars over time. Papanek (1972) finds a positive relation between aid and growth. Fayissa and El-Kaissy
(1999) show that aid positively affects economic growth in developing countries. Singh (1985) also finds evidence that foreign aid has positive and strong effects on growth when state intervention is not included. Snyder (1993) shows a positive relation between aid and growth when taking country size into account. Burnside and Dollar (1997) claim that aid works well in the good-policy environment, which has important policy implications for donors community, multilateral
Using cross-country data, I examine how foreign aid affects economic growth in developing countries over the period from 1975 to 2000. I find evidence that foreign aid significantly and negatively correlates with growth in developing countries. However, foreign aid to inland countries as well as to South Asian countries during the period of 1992-2000 is found to have a positive impact on growth. In addition, a strong divergence trend is found among countries in the data set.
The results suggest that (i) there may be problems in the present aid providing system, where aid hinders growth of developing countries (ii) the successful experience of some inland countries and South Asian nations during the period of 1992-2000 could be a good lesson for other developing countries. Finally, a strong evidence of divergence implies that if the condition is not improved in the least developing countries, there would be a large income dispersion among developing countries in the future.
Chapter I
Introduction
1.1. Background
Foreign aid is usually associated with official development assistance, which in turn is a subset of the official development finance, and normally targeted to the poorest countries (World Bank,1998).
How does foreign aid affect the economic growth of developing countries? This is a question which has drawn the attention of many scholars over time. Papanek (1972) finds a positive relation between aid and growth. Fayissa and El-Kaissy
(1999) show that aid positively affects economic growth in developing countries. Singh (1985) also finds evidence that foreign aid has positive and strong effects on growth when state intervention is not included. Snyder (1993) shows a positive relation between aid and growth when taking country size into account. Burnside and Dollar (1997) claim that aid works well in the good-policy environment, which has important policy implications for donors community, multilateral
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