Aid And Growth

The problem of International Development Assistance (IDA) has been long-standing. After the Second World War, the U.S. government carried out the Marshall Plan promptly for the recovery of European economy. With the deepening of economic globalization, since the 1950s and 1960s, developed countries had begun to provide International Development Assistance (IDA) to many developing countries, to promote their rapid development. At the beginning of the new century, under the advocacy of the United Nations, the amount of International Development Assistance (IDA) had got a rapid growth. Does the large amount of International Development Assistance (IDA) really work? We may get a deep impression on Sub-Saharan Africa. A large proportion of International Development Assistance (IDA) goes to Sub-Saharan Africa every year, in recent years, the proportion nearly reached to 50%. However, what we see is still a poor Sub-Saharan Africa, the number of poverty in this region had doubled in the past 30 years, reached to 414 million in 2010. As contrast, in the region of East Asia, the economy has showing a flourishing view. Why should there be such a big difference? The effectiveness of International Development Assistance (IDA) had been debated seriously in academia.In this paper, we will explore the effect of International Development Assistance (IDA) on recipients’ economic growth from the aspect of policy environment in recipients. Considering the focus in academic debate, we are likely to take our attention to three questions. First, can the International Development Assistance (IDA) accelerate recipients’ economic growth? Second, are there diminishing returns to International Development Assistance (IDA) on recipients’ economic growth? Third, as the effect of International Development Assistance (IDA) in different countries differs a lot, we will focus on the effect of recipients’policy environment, and study how it can affect International Development Assistance (IDA) working on recipients’ economic growth.We use the panel data of 74 countries that are net Official Development Assistance (ODA) recipients whose data are available to us during 1992 to 2012. The data is processed with an average of every three years (seven 3-year period), taking account of the business cycle. Taking the problems of endogeneity into consideration, we have found some exogenous instrumental variables for Official Development Assistance (ODA) for the TSLS model. Furthermore, as our sample includes many countries belonging to different income grades, individual effects may exist among different countries, we will also analysis the sub-sample of the low-income countries, and least developed countries separately.Our empirical research shows that, the Official Development Assistance (ODA) itself does not have a clear effect on recipients’economic growth, but the interaction term of Official Development Assistance (ODA) with policy environment always plays a significant role in recipients’ economic growth. That’s to say, the better the policy environment in recipients is, the larger the effect of Official Development Assistance (ODA) on recipients’ economic growth will be. As to the least developed countries, the diminishing effect of aid may exist.Our research supports the World Bank reports, saying that donor countries and international aid organizations should allocate more aid to developing countries with good policy environment. Considering the primary purpose of Official Development Assistance (ODA) is to reduce poverty, this principle does not always work well. Allocation of Official Development Assistance (ODA) should meet the basic needs of the poor areas, and donor countries and international aid organizations should take directly participation in aid projects. As incentive measures, more aid should be given to these developing countries that are taking efforts to improve their domestic policy environment. The recipients’ governments need to be more selfless, and devote themselves to promote growth and domestic living level. In addition, the recipients and donors should enhance their collaboration to reduce lose brought by non-cooperation games.