| Abstract: |
This paper reconsiders the role of economic policy in determining the
effectiveness of foreign aid for generating economic growth in developing
countries. We update and modify the data set originally used by Burnside and
Dollar (2000) in order to more fully consider the critique presented by
Easterly et al. (2004). Our findings suggest that the relationship among
foreign aid, government policy, and economic growth is tenuous and depends
importantly on the subset of countries included in the analysis. Good policy
enhances the effectiveness of foreign aid in spurring growth when we use the
original set of countries included in Burnside and Dollar, but this
relationship disappears for an expanded set of countries. Because the
relationship among aid, policy, and growth is likely to be nonlinear, we
present an alternative probit model emphasizing growth thresholds. Our results
from this alternative analysis confirm the conclusions of Easterly et al.,
finding little support for the view that good policy increases the probability
that foreign aid contributes to growth. |