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Keywords:

  • aid;
  • developing countries;
  • Dpd estimator;
  • economic growth;
  • investment;
  • indirect effect;
  • policy impacts;
  • sensitivity analysis

Abstract

This paper uses panel data from 77 developing countries, two measures of aid, and a dynamic panel data (DPD) estimator to investigate the effects of aid on economic growth. We find that the relationship between income growth and aid is quadratic in nature. We find a negative partial growth effect of aid at low levels of aid but a positive effect when the ratio of aid to gross national income (GNI) reaches a threshold of between 6.6 and 14.4per cent. We find a positive and significant relationship between aid and physical capital investment. Accounting for indirect effects through investment, we find a positive growth effect at all levels of aid. These results are robust to the measurement of aid, the policy environment, income levels and region. Our results differ from much of the earlier research but are consistent with research that calls for increased aid to developing countries. Copyright © 2010 John Wiley & Sons, Ltd.