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Foreign Aid

In: Social Issues

Submitted By aaronmv01
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starts with Burnside and Dollar (2000), which circulated widely as a working paper for several years in the late 1990

Where could growth be most appropriate and most beneficial

relationship between foreign aid, economic policy and growth of per capita GDP using a new database on foreign aid that had just been developed by the World Bank. They run a number of regressions in which the dependent variable of growth rates in developing countries depends on initial per capita national income, an index that measures institutional and policy distortions, foreign aid and then aid interacted with policies.

We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies.”

I will first discuss expanding their dataset to include more recent evidence and then explore how their results are affected even within the original dataset by different definitions of “aid,” “good policy” and “growth.” Easterly, Levine and Roodman (2003) use the exact same specification as Burnside and Dollar (2000), but simply added more data that had become available since their study was performed, as well as hunting for more data in their original sample period of 1970–1993

construct an index number for what is meant by good policy that includes the budget surplus, the inflation rate and a measure of the openness of an economy developed by Sachs and Warner

The standard model used to justify aid is called the “two gap” model. It was developed by Chenery and Strout in the mid-1960s. The first gap in the model addresses the difference between the amount of investment in an economy that is necessary to attain a certain rate of growth and the available domestic savings. Essentially the gap exists when the public does not save enough and thus there is not enough capital

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