On the Link between Foreign Aid and Growth in Developing countries
Keywords:
Foreign aid; aid effectiveness; aid ineffectiveness; aid-growth nexus; developing countriesAbstract
Objectives: This study aims at exploring the debates on the aid-growth nexus from both a theoretical and empirical perspective. Prior Work: Despite the hot debate on whether aid works for growth, the increasing trends of aid flows to developing countries motivates the current study for re-visiting such debates. Approach: The study uses a detailed survey of both theoretical and empirical literature on the aid-growth nexus. Results: This review found that the aid-growth nexus is the most empirically researched area, and yet evidence remains inconsistent and controversial. Two lines of debate are identified: aid effectiveness (aid proponents) and aid ineffectiveness (aid opponents). While aid proponents argue that aid positively affects growth, aid opponents found that aid has either a negative or null impact on growth. Implications: Contrary to the scholarly debates, the common belief among donors is that the effect of aid on growth is positive and aid flows to the productive/economic sectors is more growth-enhancing. Thus, aid-financing decisions by donors and policy makers should take this aspect into account. Value: Besides exploring the debates, this review discusses the reasons behind the inconsistent evidence on the aid-growth nexus and highlights the relevant methodological approaches to address this problem, mostly aid endogeneity.
References
Adedokun, Adeniyi Jimmy and Folawewo, Abiodun O. (2017). Aid selectivity practice and aid effectiveness in Sub-Saharan Africa. Review of innovation and competitiveness, 3 (2): 43-64.
Alemu, A. Mengistu and Lee Jin-Sang. (2015). Foreign aid on economic growth in Africa: a comparison of low and middle-income countries. SAJEMS NS, 18 (4): 449-462.
Alvi, Eskander, Mukherjee, Debasri, and Shukralla, Elias K. (2008). Aid, policies, and growth in developing countries: a new look at the empirics. Southern Economic Journal, 74 (3): 693-706.
Arawomo, D.F., Badejo, A.A. and Oshota, O.S. 2017. Complementarity of foreign aid and domestic savings as drivers of economic growth: evidence from WAMZ countries. Journal of Economics and Business Research, 19 (2): 159-171.
Arndt, Channing, Jones, Sam, and Tarp, Finn. (2015). Assessing foreign aid’s long-run contribution to growth and development. World Development, 69: 6-18.
Askarov, Zohidjon and Doucouliagos, Chris (2015). Development aid and growth in transition countries. World development, vol. 66, pp. 383-399, doi: 10.1.016/j.worlddev.2014.08.014.
Boone, Peter. (1996). Politics and the effectiveness of foreign aid. European Economic Review, 40 (2): 289-329.
Burnside, Craig and Dollar, David. (2000). Aid, policies, and growth. American Economic Review, 90 (4), September: 847-868.
Chenery, Hollis B. and Strout, Alan M. (1966). Foreign assistance and economic development. The American Economic Review, Volume LVI, Number 4, Part 1, September 1966.
Clemens, M.A., Radelet, Steven, Bhavnani, R.R. and Bazzi, Samuel. (2012). Counting Chickens when they hatch: timing and the effect of aid on growth. The Economic Journal, 122, June: 590-617.
Dollar, David and Easterly, William. (1999). The search for the key: aid, investment and policies in Africa. Journal of African Economics, 8 (4): 546-577.
Doucouliagos, H. and Paldam, M. (2010). The effectiveness of development aid on growth: an update. European Journal of Political Economy, Aarhus, November.
Dreher, Axel and Langlotz, Sarah. (2017). Aid and growth. New evidence using an excludable instrument. Discussion Paper Series, No. 65, June. Heidelberg University.
Dutta, N., Mukherjee, D., and Roy, S. (2015). Re-examining the relationship between domestic investment and foreign aid: does political stability matter? International Review of Applied Economics, 29 (3): 259-286.
Easterly, William, Levine, Ross and Roodman, David. (2004). Aid, policies, and growth: Comment. The American Economic Review, 94 (3), February: 774-780.
Easterly, William. (1999). The ghost of financing gap: testing the growth model used in the international financial institutions. Journal of Development Economics, 60 (2): 423-438.
_______________. (2003). Can foreign aid buy growth? Journal of Economic Perspective, 17 (3), Summer: 23-48.
Ekanayake, E. M., & Chatrna, D. (2010). The effect of foreign aid on economic growth in developing countries. Journal of International Business and Cultural Studies, 3, 1.
Eregha, P. B., & Oziegbe, T. R. (2016). Official development assistance, volatility and per capita real gdp growth in sub-Saharan African countries: a comparative regional analysis. The Journal of Developing Areas, 50(4), 363-382.
Galiani, S., Knack, S., Xu, L. C. and Zou, Ben. (2016). The effect of aid on growth: evidence from quasi-experiment. NBER Working Paper Series, WP 22164, Massachusetts, Cambridge.
Gillander, Robert. 2016. The effects of foreign aid in Sub Saharan Africa. The Economic and Social Review, 17 (7):339-360.
Jones, Yakama Manty. 2013. Testing the foreign aid-led growth hypothesis in West Africa. Birkbeck Working Papers in Management, BWPMA 1303, London.
Juselius, K., Moller, N. F. and Tarp, F. (2013). The long run impacts of foreign aid in 36 African countries: insights from multivariate time series analysis. Oxford Bulletin of Economics and Statistics, 76 (2).
Lof, M., Mekasha, T. J. and Tarp, F. (2015). Aid and income: another time series perspective. World Development, 69: 19-30.
Magesan, Arvind. 2016. Foreign and economic growth in developing countries: as instrumental variable approach. DOI: 10.13140/RG.2.1.4627.5607
Nermeen, Mohamed Abdel Aziz Harb. (2016). A study on the non-linearity hypothesis between various macroeconomic variables and economic growth in developing countries. PhD Thesis, University of Leicester.
Nowak-Lehmann, F., Dreher, A., Herzer, D., Klasen, S. and Martínez-Zarzoso, I. (2012). Does aid really raise per capita income? A time series perspective. Canadian Journal of Economics, 45(1): 288-313.
OECD, (Organization for Economic Cooperation and Development). (2017). Development Co-operation Report 2017: Data for Development. OECD Publishing, Paris.
Phiri, Maurice W. (2017) The impact of aid on the economic growth of developing countries (LDCs) in Sub-Saharan Africa. Gettysburg Economic Review, 10 (4): 28-48.
Rahnama, M., Fawaz, F. and Gittings, K. (2017). The effects of foreign aid on growth in developing countries. The Journal of Developing Areas, 51 (3), Summer: 153-171.
Rajan, R.G. and Subramanian. (2008). Aid and growth: What does cross-country evidence really show? The Review of Economics and Statistics, 90(4), November: 643-665.
Reidy, Paul. 2016. Aid and growth revisited: impact of foreign aid and growth in Sub-Saharan Africa. The Student Economic Review, 30: 114-128, Dublin 2, Ireland
Tait, L., Siddique, A. and Chatterjee, I. (2015). Foreign aid and economic growth in Sub-Saharan Africa. University Western Australia Working Papers, No. 1-35, March.
Tang, K.-B. and Bundhoo, D. (2017). Foreign Aid and Economic Growth in Developing Countries: Evidence from Sub-Saharan Africa. Theoretical Economics Letters, 7, 1473-1491. https://doi.org/10.4236/tel.2017.75099.
Todaro, Michael T. and Smith, Stephen C. (2015). Economic Development, 12th edition. Pearson.
Alemu, A. Mengistu and Lee Jin-Sang. (2015). Foreign aid on economic growth in Africa: a comparison of low and middle-income countries. SAJEMS NS, 18 (4): 449-462.
Alvi, Eskander, Mukherjee, Debasri, and Shukralla, Elias K. (2008). Aid, policies, and growth in developing countries: a new look at the empirics. Southern Economic Journal, 74 (3): 693-706.
Arawomo, D.F., Badejo, A.A. and Oshota, O.S. 2017. Complementarity of foreign aid and domestic savings as drivers of economic growth: evidence from WAMZ countries. Journal of Economics and Business Research, 19 (2): 159-171.
Arndt, Channing, Jones, Sam, and Tarp, Finn. (2015). Assessing foreign aid’s long-run contribution to growth and development. World Development, 69: 6-18.
Askarov, Zohidjon and Doucouliagos, Chris (2015). Development aid and growth in transition countries. World development, vol. 66, pp. 383-399, doi: 10.1.016/j.worlddev.2014.08.014.
Boone, Peter. (1996). Politics and the effectiveness of foreign aid. European Economic Review, 40 (2): 289-329.
Burnside, Craig and Dollar, David. (2000). Aid, policies, and growth. American Economic Review, 90 (4), September: 847-868.
Chenery, Hollis B. and Strout, Alan M. (1966). Foreign assistance and economic development. The American Economic Review, Volume LVI, Number 4, Part 1, September 1966.
Clemens, M.A., Radelet, Steven, Bhavnani, R.R. and Bazzi, Samuel. (2012). Counting Chickens when they hatch: timing and the effect of aid on growth. The Economic Journal, 122, June: 590-617.
Dollar, David and Easterly, William. (1999). The search for the key: aid, investment and policies in Africa. Journal of African Economics, 8 (4): 546-577.
Doucouliagos, H. and Paldam, M. (2010). The effectiveness of development aid on growth: an update. European Journal of Political Economy, Aarhus, November.
Dreher, Axel and Langlotz, Sarah. (2017). Aid and growth. New evidence using an excludable instrument. Discussion Paper Series, No. 65, June. Heidelberg University.
Dutta, N., Mukherjee, D., and Roy, S. (2015). Re-examining the relationship between domestic investment and foreign aid: does political stability matter? International Review of Applied Economics, 29 (3): 259-286.
Easterly, William, Levine, Ross and Roodman, David. (2004). Aid, policies, and growth: Comment. The American Economic Review, 94 (3), February: 774-780.
Easterly, William. (1999). The ghost of financing gap: testing the growth model used in the international financial institutions. Journal of Development Economics, 60 (2): 423-438.
_______________. (2003). Can foreign aid buy growth? Journal of Economic Perspective, 17 (3), Summer: 23-48.
Ekanayake, E. M., & Chatrna, D. (2010). The effect of foreign aid on economic growth in developing countries. Journal of International Business and Cultural Studies, 3, 1.
Eregha, P. B., & Oziegbe, T. R. (2016). Official development assistance, volatility and per capita real gdp growth in sub-Saharan African countries: a comparative regional analysis. The Journal of Developing Areas, 50(4), 363-382.
Galiani, S., Knack, S., Xu, L. C. and Zou, Ben. (2016). The effect of aid on growth: evidence from quasi-experiment. NBER Working Paper Series, WP 22164, Massachusetts, Cambridge.
Gillander, Robert. 2016. The effects of foreign aid in Sub Saharan Africa. The Economic and Social Review, 17 (7):339-360.
Jones, Yakama Manty. 2013. Testing the foreign aid-led growth hypothesis in West Africa. Birkbeck Working Papers in Management, BWPMA 1303, London.
Juselius, K., Moller, N. F. and Tarp, F. (2013). The long run impacts of foreign aid in 36 African countries: insights from multivariate time series analysis. Oxford Bulletin of Economics and Statistics, 76 (2).
Lof, M., Mekasha, T. J. and Tarp, F. (2015). Aid and income: another time series perspective. World Development, 69: 19-30.
Magesan, Arvind. 2016. Foreign and economic growth in developing countries: as instrumental variable approach. DOI: 10.13140/RG.2.1.4627.5607
Nermeen, Mohamed Abdel Aziz Harb. (2016). A study on the non-linearity hypothesis between various macroeconomic variables and economic growth in developing countries. PhD Thesis, University of Leicester.
Nowak-Lehmann, F., Dreher, A., Herzer, D., Klasen, S. and Martínez-Zarzoso, I. (2012). Does aid really raise per capita income? A time series perspective. Canadian Journal of Economics, 45(1): 288-313.
OECD, (Organization for Economic Cooperation and Development). (2017). Development Co-operation Report 2017: Data for Development. OECD Publishing, Paris.
Phiri, Maurice W. (2017) The impact of aid on the economic growth of developing countries (LDCs) in Sub-Saharan Africa. Gettysburg Economic Review, 10 (4): 28-48.
Rahnama, M., Fawaz, F. and Gittings, K. (2017). The effects of foreign aid on growth in developing countries. The Journal of Developing Areas, 51 (3), Summer: 153-171.
Rajan, R.G. and Subramanian. (2008). Aid and growth: What does cross-country evidence really show? The Review of Economics and Statistics, 90(4), November: 643-665.
Reidy, Paul. 2016. Aid and growth revisited: impact of foreign aid and growth in Sub-Saharan Africa. The Student Economic Review, 30: 114-128, Dublin 2, Ireland
Tait, L., Siddique, A. and Chatterjee, I. (2015). Foreign aid and economic growth in Sub-Saharan Africa. University Western Australia Working Papers, No. 1-35, March.
Tang, K.-B. and Bundhoo, D. (2017). Foreign Aid and Economic Growth in Developing Countries: Evidence from Sub-Saharan Africa. Theoretical Economics Letters, 7, 1473-1491. https://doi.org/10.4236/tel.2017.75099.
Todaro, Michael T. and Smith, Stephen C. (2015). Economic Development, 12th edition. Pearson.
Published
2020-10-08
How to Cite
Tefera, M., & Nicholas, O. . (2020). On the Link between Foreign Aid and Growth in Developing countries: Array. Acta Universitatis Danubius. Œconomica, 16(6). Retrieved from https://dj.univ-danubius.ro/index.php/AUDOE/article/view/582
Issue
Section
Economic Development, Technological Change, and Growth
License
The author fully assumes the content originality and the holograph signature makes him responsible in case of trial.
