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Foreign aid and productivity

Journal article
Authors Ann Veiderpass
Published in Journal of Productivity Analysis
Volume 43
Issue 3
Pages 249-258
ISSN 0895-562X
Publication year 2015
Published at Department of Economics
Pages 249-258
Language en
Keywords Country comparison, Aid, Data envelopment analysis, Malmquist Productivity Index, Bootstrap, Confidence intervals, D24, O57
Subject categories Economics


The Millennium Summit 2000 and the declaration of the Millennium Development Goals again brought to the fore questions on the importance of foreign aid. Consequently, the long debated question of whether or not foreign aid enhances economic growth and efficiency in resource use received renewed attention. However, consensus has still eluded researchers and policy makers. In spite of numerous studies, there is little evidence of a significant positive effect on the long-term growth of poor countries. While most previous studies have relied on simple cross country regressions, this study suggests a new approach, evaluating country performance in a production theory context using productivity as a measure, applying the non-parametric Malmquist Productivity Index and then linking this country performance to amount of foreign aid received. A balanced panel of 89 low and middle income countries from five different geographical categories is studied over a period of 11 years. By use of a novel visual test the countries are grouped into three categories, significant productivity decline, growth or no change. The different categories are based on confidence intervals resulting from bootstrapping. When linking country performance to aid in a more traditional way, a significant, but weak correlation is found.

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