Foreign Aid and Quality of Governance in Latin America

Abstract

While there is overwhelming evidence that governance has a significant impact on economic devlopment of a country, the findings of earlier studies on the effect of foreign aid on governance is often contradictory. In this paper, using panel data on 20 countries of Latin America for the period 1996-2014, we examined the impact of foreign aid on governance using the Random Effects and the Feasible Generalized Squares estimation techniques. The findings suggest that foreign aid has a positive influence on quality of governance. The empirical evidence is strong as the findings hold true not only when a composite measure of governance is employed in the model, but also generally when the six individual dimensions of governance are used. The study adds to the body of literarure on the subject and is especially important as many of the countries in the sample are significant recipients of foreign aid. Future studies may add to the existing literature by studying other regions where there is a significant flow of international aid.