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.