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Foreign Aid Conditionality and Economic Growth

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Lessons on Foreign Aid and Economic Development

Abstract

Why do we observe failure of foreign aid in promoting economic growth? This chapter disentangles this puzzle by reviewing the literature addressing the “aid-policies/institutions-growth” nexus. Multiple reasons attribute to the failure of foreign aid in the present literature. Limited data and imperfect methodology hamper this type of research. Statistically, the negative correlation between aid and growth makes it difficult to causally identify the effectiveness of aid on economic growth. Empirically, although good policy may boost economic growth, it seems irrelevant to foreign aid effectiveness. Institutions, however, may explain aid’s ineffectiveness at promoting economic growth.

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Notes

  1. 1.

    The first person to have used the term ‘poverty trap’ is Rostow (1959) in his ‘The Stages of Economic Growth’.

  2. 2.

    BD’s policy index which has three components- trade openness, budget surplus, and inflation. The 1970–1993 period is provided by BD’s original dataset; 1990–2013 policy index is calculated by Jia and Williamson (2019), following BD’s methodology.

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Authors and Affiliations

  1. Muskingum University, New Concord, OH, USA

    Shaomeng Jia

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  1. Shaomeng Jia
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Editors and Affiliations

  1. University of Wisconsin-La Crosse, La Crosse, WI, USA

    Nabamita Dutta

  2. Mississippi State University, Mississippi, MS, USA

    Claudia R. Williamson

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Jia, S. (2019). Foreign Aid Conditionality and Economic Growth. In: Dutta, N., Williamson, C.R. (eds) Lessons on Foreign Aid and Economic Development. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-22121-8_2

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