Foreign Aid and Economic Growth in the Developing Countries - a Cross-Country Empirical Analysis

12252 Words Dec 30th, 2010 50 Pages
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
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1.3. Organization of the Study

The study is organized as follows. Chapter II reviews the literature with various outcomes shown by different authors with different views and models. Chapter III provides an overview of the regions in the study. Chapter IV describes the data and methodology. Empirical results and policy implications are discussed in chapter V. Chapter VI concludes the study.

Chapter II

Literature Review

In general, aid is found to have a positive impact on economic growth through several mechanisms (i) aid increases investment (ii) aid increases the capacity to import capital goods or technology (iii) aid does not have an adverse impact on investment and savings (iv) aid increases the capital productivity and promotes endogenous technical change (Morrissey,
2001).

Papanek (1973), in a cross-country regression analysis of 34 countries in the 1950s and 51 countries in the1960s, treating foreign aid, foreign investment, other flows and domestic savings as explanatory variables, finds that foreign aid has a substantially greater effect on growth than the other variables. He explains that “aid, unlike domestic savings, can fill the foreign exchange gap as well as the savings gap. Unlike foreign private investment and other foreign inflows, aid is supposed to be specifically designed to foster
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