The impact of government policy on aid effectiveness

Abstract

Thesis (M.P.P.)--Georgetown University, 2010.; Includes bibliographical references.; Text (Electronic thesis) in PDF format. Nearly a decade ago, Burnside and Dollar (2000) published a seminal article on the relationship between aid and economic development in the American Economic Review. Burnside and Dollar (2000) suggested that countries with good polices could gain more from aid, and established a clear causal link between aid and growth in gross domestic product (GDP) through policy. However, the Burnside and Dollar study is subject to several fatal errors, and their results are not robust to either a change in the period under investigation or model specification (Easterly et al. 2003). This study revisits whether government policy can increase effectiveness of aid by exploring the definition of what good policy is and aid effectiveness is measured. The definition of policy is broaden by incorporating indicators of health and education, and evidence is presented to suggest that aid can be particularly effective in improving poverty and inequality outcomes that are likely correlated with future GDP growth. In addition, this paper focuses much of its analysis on countries sub-Saharan Africa, which historically have been aid dependent but also low rates of GDP growth. Using a more comprehensive definition of policy than Burnside and Dollar, this study finds positive effects of policy and aid on poverty rate reduction and increased equality in sub-Saharan Africa, and marginal positive effects on GDP growth in countries with higher policy ratings. In addition, these findings are robust to many of the criticisms leveled against Burnside and Dollar (2000) over the last ten years.

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