FOREIGN AID AND DOMESTIC SAVINGS: THE CROWDING OUT EFFECT

Abstract

The paper examines the relationship between foreign aid and savings using annual data for 119 countries. Regressions for each country are run separately in order to find which countries have a positive aid-saving experience. The explanatory variables chosen are thought to be exogenous to current economic policy. Countries are placed into five categories according to the strength of the aid-saving relationship. Few countries show evidence of substantial crowding out. Consequently, aid is found to be clearly beneficial to saving and, hence, investment for the preponderance of these countries.