Economic Growth In Recipient Countries Research Articles

Does foreign aid play a role in promoting economic development? Evidence from US aid

Does foreign aid always contribute to economic development in recipient countries? This question has never been fully addressed. Using data on US aid to 128 countries worldwide from 2000 to 2019, this paper examines the relationship between US aid and economic growth in recipient countries, and the moderating role of institutional quality and absorptive capacity in shaping this relationship. Different types of US aid are considered, including economic aid and military aid. The results show that the relationship between economic aid and economic growth is U-shaped, while military aid has a positive linear relationship with economic growth. Moreover, we find that the institutional quality of the recipient country negatively moderates the relationship between US aid and economic growth. Additionally, the absorptive capacity of the recipient country positively moderates the relationship between economic aid and economic growth, whereas the relationship between military aid and economic growth is not affected by absorptive capacity.

Can energy aid drive greener economic growth? A global evidence.

As a bilateral or multilateral international policy, foreign aid has the potential to contribute to economic growth in recipient countries, but the impact on green growth, especially aid flows to the energy sector, is unclear. Existing studies have paid little attention to the actual effects of whether energy aid is effective in raising green total factor productivity (GTFP) in recipient countries. To fill this gap, this study investigates the dynamic impact of energy aid on GTFP in recipient countries using balanced panel data for 92 countries from 2002 to 2019, and the study also examines potential sectoral heterogeneity and impact mechanisms. The results show that energy aid can effectively contribute to improving GTFP in recipient countries, but this scale effect varies significantly by aid type, revealing sectoral heterogeneity in the impact of energy aid. In addition, energy aid can indirectly enhance GTFP in recipient countries by promoting financial development, optimizing energy mix, and improving energy efficiency. Both government quality and human capital have a positive moderating effect on the energy aid-GTFP relationship. These findings reveal an important mechanism for energy aid to contribute to green economic growth and provide theoretical support and a practical basis for the formulation of more targeted aid policies.

The impact of development strategy choice on capital mobility and economic growth

AbstractForeign direct investment (FDI) has been widely acknowledged as a prominent vehicle to transfer technology, increase productivity and promote economic growth in recipient countries. However, FDI's contribution to economic growth can be more or less pronounced across countries conditioned on the development strategy adopted. This paper theoretically and empirically explores the impact of FDI inflows on economic growth when a comparative advantage development strategy is followed and when it is defied. By employing cross‐country panel data evidence for 72 countries over the 1971–2019 period, the results suggest that FDI is an essential driver for economic growth. However, the greater the level of defiance from comparative advantages estimated by the technology choice index (TCI), the lower the FDI inflow contributes to economic growth. The findings are more significant for the instrumental variable approach postulating the potential endogeneity of FDI and TCI and decomposed FDI by sector.

Aid, China, and Growth: Evidence from a New Global Development Finance Dataset

This article introduces a new dataset of official financing from China to 138 developing countries between 2000 and 2014. It investigates whether Chinese development finance affects economic growth in recipient countries. The results demonstrate that Chinese development finance boosts short-term economic growth. An additional project increases growth by between 0.41 and 1.49 percentage points 2 years after commitment, on average. While this study does not find that significant financial support from China impairs the overall effectiveness of aid from Western donors, aid from the United States tends to be more effective in countries that receive no substantial support from China. (JEL F35, O19, O47, P33, P34)

Has International Aid Promoted Economic Growth in Africa?

AbstractUsing panel data on 47 African countries from 1980–2013, this paper investigates the effects of aid on Africa's economic growth from the perspective of political stability. We find that international aid can promote economic growth in Africa, but the effectiveness of aid depends on countries’ political stability. Further, the intensity of aid affects its effectiveness. When the aid–GDP ratio is between 0 and 69 per cent, aid can promote economic growth in recipient countries, and when this ratio is 27 per cent, the marginal impact of aid on economic growth is maximized. The findings of this paper suggest that providers of aid should avoid providing a substantial amount of aid to countries at risk of political unrest, and they must determine the optimal scale of aid based on the economic development of recipient countries in order to enable aid to generate better results. Recipient countries should maintain social and political stability and ensure that they do not develop an excessive dependence on aid so that they can achieve the self‐sustainable development of their own economies.

Aid, China, and Growth: Evidence from a New Global Development Finance Dataset

This paper introduces a new dataset of official financing — including foreign aid and other forms of concessional and non-concessional state financing — from China to 138 countries between 2000 and 2014. We use these data to investigate whether and to what extent Chinese aid affects economic growth in recipient countries. To account for the endogeneity of aid, we employ an instrumental-variables strategy that relies on exogenous variation in the supply of Chinese aid over time resulting from changes in Chinese steel production. Variation across recipient countries results from a country’s probability of receiving aid. Controlling for year- and recipient-fixed effects that capture the levels of these variables, their interaction provides a powerful and excludable instrument. Our results show that Chinese official development assistance (ODA) boosts economic growth in recipient countries. For the average recipient country, we estimate that one additional Chinese ODA project produces a 0.7 percentage point increase in economic growth two years after the project is committed. We also benchmark the effectiveness of Chinese aid vis-a-vis the World Bank, the United States, and all members of the OECD’s Development Assistance Committee (DAC). Our results indicate that Chinese, U.S., and OECD-DAC ODA have positive effects on economic growth, but we find no robust evidence that World Bank aid promotes growth. We also find that, irrespective of the funding source, less concessional and more commercially-oriented types of official finance do not boost economic growth. Finally, we test the popular claim that significant financial support from China impairs the effectiveness of grants and loans from Western donors and lenders. Our results do not support this claim.

Exchange Rate Flexibility and the Effect of Remittances on Economic Growth

AbstractThis paper studies the question of whether exchange rate policy affects the impact of remittances on economic growth in recipient countries. The findings indicate that more flexible exchange rate regimes are associated with a greater increase in economic growth following an increase in remittances, but also that the impact of remittances on growth is positive under a fixed regime. The results further show that the effect of remittances under a fixed exchange rate regime is positive in less financially developed countries as well, but do not provide conclusive evidence that this effect varies inversely with exchange rate flexibility in such economies as theorized; the results being sensitive to the choice of financial development indicator.

The Real Impact of Basel Ratings-Based Capital Rules on the Finance-Growth Nexus

We investigate whether ratings-based banking regulation introduced under the Basel capital framework has had any impact on the finance-growth nexus via the foreign credit channel. Using data on GDP growth per capita and cross-border bank lending to 77 countries between 1999 to 2013 we find that since the implementation of Basel 2 capital rules, risk weight changes mapped to sovereign credit rating revisions have exerted a more significant effect on economic growth in both recipient and lender countries. We also find direct evidence to indicate that the practice of global banks in increasing their foreign lending to investment grade sovereigns given their lower risk-weights has contributed to lower economic growth in these recipient countries. However, the adverse effects of the Basel capital rules are ameliorated in the presence of more open financial markets with better developed banking systems.

The Political Economy of the United States Economic Growth Programme in Pakistan

AbstractThis paper examines the US assistance for economic growth in Pakistan since 2002. Delving into the political economy of the United States Agency for International Development's (USAID) economic growth programme, this paper appraises the effectiveness of economic growth projects and their impact on the economy of Pakistan by analysing donor's project execution mechanisms and priority areas for economic development. This study finds that despite USAID's proclamation of spurring growth through their neoliberal‐oriented interventions, the economy has shown a gloomy picture in recent years and hence questions the perception that foreign aid can spur economic growth in recipient countries. Copyright © 2014 John Wiley & Sons, Ltd.

Foreign Aid Effectiveness and the Strategic Goals of Donor Governments

This paper argues that foreign aid can promote economic growth in recipient countries by facilitating economic reform, but only when the strategic benefits associated with providing aid are small for donor governments. When the strategic benefits are large, foreign aid becomes ineffective because Western governments cannot credibly enforce their conditions for economic reform. This paper presents evidence consistent with both the cause and effect of this argument. Based on the understanding that Western aid was driven more (less) by strategic factors during the Cold War era (post-Cold War era), it shows that aid has been positively associated with economic reform, but only after 1990 when Western governments could more credibly threaten to curtail their aid if such reform was not forthcoming. It also shows that aid has promoted economic growth, but only after 1990 when the strategic benefits associated with aid provision declined for most Western donors.

The Politics of Effective Foreign Aid

There is little consensus on whether foreign aid can reliably increase economic growth in recipient countries. We review the literature on aid allocation and provide new evidence suggesting that since 1990 aid donors reward political contestation but not political inclusiveness. Then we examine some challenges in analyzing cross-national data on the aid/growth relationship. Finally, we discuss the causal mechanisms through which foreign aid might affect growth and argue that politics can be viewed as both (a) an exogenous constraint that conditions the causal process linking aid to growth and (b) an endogenous factor that is affected by foreign aid and in turn impacts economic growth.

The Impact of Foreign Direct Investments on the Economic Growth of Developing Countries: Some Empirical Evidence from Tanzania

The role of Foreign Direct Investment (FDI) has been widely recognized as a growth-enhancing factor. These flows enable host countries to achieve investment levels beyond what their own domestic savings can allow. Consistent with the ‘gap’ models which have followed the Harrod–Domar tradition, FDI is expected to bridge the savings, foreign exchange, technology or any other gaps said to impede most developing countries from achieving the desired levels of economic growth. In a typical less-developing country like Tanzania, savings are so low they cannot finance the investment needed. Likewise, the inflows of foreign exchange are too small to finance the imports of capital goods needed. More importantly, FDI is an important means of transferring modern technology and innovation from developed to developing countries.
 This article analyzes the role of FDI in promoting economic growth through improvement of trade in Tanzania. Using macroeconomic data from various institutions in Tanzania, and employing a model in which growth is influenced by factors such as FDI, trade, inflation, employment and a combination of factors like human capital and FDI, the study has shown among other things that FDI flows enhance economic growth in recipient countries.
 However, the study also shows that factors like human capital and trade do not have the expected positive impact on a country’s growth. This suggests that there is need for institutional stabilization policies and other ‘conditioning factors’ for FDI driven growth to materialize. Some of the ‘conditioning factors ‘needed for FDI to have the desired growth enhancing impacts include expansion of education opportunities from primary to tertiary levels, targeting inflation, and reducing the tax burden.

Foreign Aid and Fiscal Governance in Melanesia

Summary Recent research suggests that foreign aid is effective at spurring economic growth in recipient countries but its effectiveness is likely to depend upon a number of factors. Arguably, the most important factor determining aid effectiveness is how recipient governments mediate foreign aid inflows. This paper investigates this issue for the Melanesian countries of Fiji, Papua New Guinea, the Solomon Islands, and Vanuatu for the period 1989–2002. Results suggest that foreign aid has led to increases in developmental expenditures and to falls in tax revenues and borrowing. Results also suggest a very different response to aid grants versus loans.

Overcoming Barriers to Reform:on Incentive-Compatible International Assistance

International financial assistance (loans and grants) can potentially raise recipients' welfare in two ways, by affecting a direct resource transfer and by facilitating efficiency-enhancing reforms. In practice, barriers to reform limit the potential of assistance to deliver these two dividends. In this paper, we analyze assistance programs designed to ensure that recipient governments voluntarily adopt reforms and overcome barriers associated with: (i) the reaction of special interests to the prospect of reform; (ii) the possibility of default and political instability in the recipient country; and (iii) adverse selection and moral hazard. Reform barriers raise the cost of incentive-compatible assistance and may result either in no assistance being forthcoming or assistance that ensures repayment but not the implementation of reforms. Critical to the choice of assistance programs is the size of the rent accruing to special interests in the absence of reform and the limited liability rents needed to ensure that repayment terms do not threaten the country's political stability. Optimal assistance contracts feature flexible repayment terms related to real economic growth in recipient countries.

Overcoming Barriers to Reform: On Incentive-Compatible International Assistance

International financial assistance (loans and grants) can potentially raise recipients' welfare in two ways, by affecting a direct resource transfer and by facilitating efficiency-enhancing reforms. In practice, barriers to reform limit the potential of assistance to deliver these two dividends. In this paper, we analyze assistance programs designed to ensure that recipient governments voluntarily adopt reforms and overcome barriers associated with: (i) the reaction of special interests to the prospect of reform; (ii) the possibility of default and political instability in the recipient country; and (iii) adverse selection and moral hazard. Reform barriers raise the cost of incentive-compatible assistance and may result either in no assistance being forthcoming or assistance that ensures repayment but not the implementation of reforms. Critical to the choice of assistance programs is the size of the rent accruing to special interests in the absence of reform and the limited liability rents needed to ensure that repayment terms do not threaten the country's political stability. Optimal assistance contracts feature flexible repayment terms related to real economic growth in recipient countries.

Foreign Aid and Economic Growth: An Empirical Analysis

After more than forty years of foreign aid programs and numerous studies of the impact aid has had on economic growth in recipient countries, the strength and nature of the aid‐growth relationship is still unknown. This study contends that results from previous studies have in aggregate been inconclusive largely because of methodological limitations and that a significant aid‐growth relationship does exist. Further, the nature of the relationship (for example, positive or negative) varies across the level of economic development in aid‐receiving countries. The expansion method is used here to expand initial models of economic growth into models which better explain the aid‐growth relationship by incorporating the relationships that aid may have with other determinants of economic growth.