Impact of Foreign Aid on Growth and Trade
Keshab Bhattarai

Foreign aid from the donors may or may not raise growth rates in receiving countries. In general, they may increase investment but if the amount of aid is associated with conditionality of exports, that will have negative impacts on growth rates. Simulation of the analytical model shows that if TFP grows faster in the recipient countries more than in the donors then developing countries (DCs) can converge in the capital output ratios and investment saving ratios with similar growth patterns as their advanced country (AC) donors over the long horizon. If the resource flows out of the developing countries in return to aid inflows this will have harmful effects in growth of developing economies. Econometric estimates show that investment rather than aid was factors contributing to growth in DCs. Exports tied to aid have been harmful for growth of recipient countries. Panel data analyses shows British aid has contributed to growth in recipient countries as British exports to Asian DCs were positively related to by their level of per capita income irrespective of the amounts of British aid to those economies.

Full Text: PDF     DOI: 10.15640/jeds.v4n3a4