3_Easterly

3_Easterly - Can Foreign Aid Buy Growth? William Easterly...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Can Foreign Aid Buy Growth? William Easterly William Easterly is Professor of Economics, New York University, New York City, New York and Senior Fellow, Center for Global Development, Washington, D.C. William.Easterly@NYU.Edu Abstract: The widely publicized finding that “aid promotes growth in a good policy environment” is not robust to the inclusion of new data or alternative definitions of “aid”, “policy” or “growth”. The idea that “aid buys growth” is on shaky ground theoretically and empirically. It doesn’t help that aid agencies face poor incentives to deliver results and underinvest in enforcing aid conditions and performing scientific evaluations. Aid should set more modest goals, like helping some of the people some of the time, rather than trying to be the catalyst for society-wide transformation.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Research on foreign aid effectiveness and growth frequently becomes a political football. But when a regression result is passed from one source to the next, context is often stripped away so that what the result means in public discussion is different than what the original research actually demonstrated. Consider the revealing episode of how an academic paper on foreign aid influenced actual foreign aid commitments. The story starts with an academic study by Burnside and Dollar (2000), which circulated widely as a working paper for several years in the late 1990s before publication in the high-profile American Economic Review . The authors set out to investigate the 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 depend on initial per capita national income, an index that measures institutional and policy distortions, foreign aid, and then aid interacted with policies. To avoid the problems that aid and growth may be correlated over periods of a few years, but not on a year-to-year basis, they divide their sample into six four-year time periods running from 1970-73 to 1990-93. In certain specifications they also include variables for ethnic fractionalization, whether assassinations occurred, dummy variables for certain regions, and even a measure of arms imports. In many of their specifications, they found the interaction term between foreign aid and good policy to be significantly positive, and summarized (p. 847): “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.” 2
Background image of page 2
I believe the Burnside and Dollar (2000) paper meets high academic standards, is intuitively plausible, their conclusions are appropriately hedged, and the paper has become a healthy stimulus to further research. However, their paper also was the basis of a policy recommendation to increase foreign aid, if only policies were good, without
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 45

3_Easterly - Can Foreign Aid Buy Growth? William Easterly...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online