Analysis Of The Effects Of Developed Countries’ Foreign Aid

The history of development assistance to developing countries and LDCs can date back to the1960s.However, the effects of aid are always being disputed. Before2002, the effects of aid usually referred to the relationship between aid and economic growth or that between aid and poverty reduction. The analytical framework based on these relationships can be regarded as a "results-oriented" analytical framework. Since2002, Organization for Economic Co-operation and Development-Development Assistance Committee (OECD-DAC) put forward the concept of aid effectiveness, which being used widely to measure the effects of aid. Since then, whether the donors’ processes meet the indictors in "Paris Declaration" provides the basis of the "process-oriented" analysis framework. So the analysis framework of the effects of aid gradually from the "results-oriented" to "process-oriented" and "results-oriented" parallel analysis of mechanisms. With the development of the research on aid effectiveness, the measure between aid and economic growth or poverty reduction also analyses the effects of aid in many different empirical ways.Since the analysis of aid and economic growth are more general, this article will focus on the relationship between aid and economic growth as a measure of the "results-oriented effects "of aid. Overall, this article will analyze the effects of aid in a comprehensive way, on the one hand, we examine the aid effectiveness, and on the other hand we analyze the economic effects of aid. This paper base on the normal economic growth model and then add the aid variables in this model to measure the relationship between aid and economic growth. Considering drug model and good policy model, we use the policy index and the quadratic term of aid in our empirical model. To ensure the robustness of the results, and eliminate the effects of endogenous, this paper takes PCSE estimation method and system GMM estimation model. Then we concluded that only if the recipient country which is low income has a good policy environment, aid will promote the economic growth.