Foreign Aid: Good for Investment, Bad for Productivity

Eskander Alvi · Aberra Senbeta

12 citations0/0 files storedOxford Development Studies

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International Development and Aid Economic Growth and Productivity Economic Growth and Development

Abstract

This paper examines the effects of aid on sources of growth: capital accumulation and total factor productivity (TFP) growth; the latter captures the effect on growth after removing the contribution of factor accumulation. Given the role of TFP in explaining cross-country differences in income levels and growth rates, the productivity effect can play a significant role in explaining the impact of aid on growth. Contradictory effects of aid were found: aid boosts investment but adversely affects TFP, suggesting that efficiency losses may undermine the overall effects of aid on growth. It was also found that aid reduces the efficacy of financial institutions in supporting productivity growth, a surprising result that possibly illuminates the nature of aid distribution in receiving countries.

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References

1991Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations 1998Initial conditions and moment restrictions in dynamic panel data models 1995Another look at the instrumental variable estimation of error-components models 1992A Contribution to the Empirics of Economic Growth 1995Initial conditions and moment restrictions in dynamic panel data models 2000Financial intermediation and growth: Causality and causes n.d.Aid, Policies, and Growth 2000Finance and the sources of growth

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