Impact of foreign aid on growth and trade

Abstract

Foreign aid from the donors may or may not raise growth rates in receiving countries. In general they may increase investment but if the amount of aid is associated with conditionality of exports, that will have negative impacts on growth rates. Simulation of the analytical model shows that if TFP grows faster in the recipient countries more than in the donors then DCs can converge in the capital output ratios and investment saving ratios with similar growth patterns as their AC donors over the long horizon. If the resource flows out of the developing countries in return to aid inflows this will have harmful effects in growth of developing economies. Econometric estimates show that investment rather than aid was a factor contributing to growth in DCs. Exports tied to aid have been harmful for growth of recipient countries. British exports to developing Asian countries were more influenced by their level of per capita income than the amount of British aid to those economies.

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