Aid, the public sector and the market in less developed countries: A return to the scene of the crime

Abstract

Abstract The paper returns to the question of what is the correct structural form for the relationship between aid, other financial flows, and economic growth rates, using a crosssection approach and – for the first time – data for the entire 1980s as well as the 1960s and 1970s. For the 1980s the aggregate partial regression coefficient of aid on growth emerges, for the first time, as positive and (just) significant, although this result does not survive the partitioning of the sample into sub‐groups. It remains obvious that the effect of aid on growth is country‐specific, and in the later part of the paper we test a new approach under which aid effectiveness passes through a cycle, first increasing and then diminishing as a country's stage of economic development alters. If this approach is accepted (and the initial results, with an informal test, are promising) the overall crosssection relationship between aid and growth, abstracting from other influences, will be neutral in most periods.

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