The Impact of Foreign Aid's 7 Functional Categories on Economic Development in Recipient Countries *

Abstract

There are 3 major views on the effectiveness of foreign aid. First, foreign aid is perceived as positive in terms of its effect on growth. Second, foreign aid is effective when certain conditions (e.g. political conditions) are satisfied. Third, aid has neither significant impact nor has it positive returns on economic growth. A substantial part of foreign aid research has been focused on total amount of aid‘s effects on economic growth. To clarify all these issues, 7 major functional types of aid are examined (e.g. social services and infrastructure). From the methodology perspective, we use panel data techniques such as the fixed effects, random effects and system GMM. For describing economic development, we use the proxies of ?PQLI (Physical Quality of Life Index),‘ HDI (Human Development Index), infant mortality rate, age dependency ratio, adult literacy rate, as well as GDP growth, and others. All these variables are used as dependent variables to judge aid‘s effectiveness. Concerning the independent variables, we use a variety of them as per literature and the 7 categories of aid. As a result of this analysis all categories of aid affect our dependent variables in different ways. Two important consequences can be drawn from our study. First, our paper confirms the positive impact of foreign aid on economic development as many other researchers have been pointed and contrary to those who have suggested a negative impact of foreign aid. And second, both recipient and donor countries can see the significance and impact of different categories of aid more precisely.

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