Can foreign aid buy growth

Abstract

E conomic research on foreign aid effectiveness and economic growth fre-quently becomes a political football. But when a regression result is passedfrom one source to the next, context is often stripped away so that what the result means in public discussion is different than what the original research actually demonstrated. Consider the revealing episode of how an academic paper on foreign aid influenced actual foreign aid commitments. The story starts with an academic study by Burnside and Dollar (2000), which circulated widely as a working paper for several years in the late 1990s before publication in the high-profile American Economic Review. The authors set out to investigate the relationship between foreign aid, economic policy and growth of per capita GDP using a new database on foreign aid that had just been developed by the World Bank. They run a number of regressions in which the dependent variable of growth rates in developing coun-tries depends on initial per capita national income, an index that measures insti-tutional and policy distortions, foreign aid and then aid interacted with policies. To avoid the problems that aid and growth may be correlated over periods of a few years, but not on a year-to-year basis, they divide their sample into six four-year time periods running from 1970–1973 to 1990–1993. In certain specifications, they also include variables for ethnic fractionalization, whether assassinations occurred, dummy variables for certain regions and even a measure of arms imports. In many of their specifications, they found the interaction term between foreign aid and good policy to be significantly positive, and they summarized (p. 847): “We fin