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To
aid or not to aid: Foreign aid and productivity
in cross-country regressions.
Pablo A. Selaya
November 2005
The paper
reexamines empirically the robustness of competing theories of foreign aid effectiveness.
By shifting the focus from the effects of aid on income to effects
of aid on productivity, it is possible to put to test 3 existing
theories of foreign
aid effectiveness. The results provide support for the hypotheses that (i)
aid
has a positive effect in fostering growth of average productivity, (ii)
aid doesn't operate
with diminishing returns, and (iii) the magnitude of the total effect
depends on
climate-related circumstances. The results support the policy
recommendation previously
made in the literature to seriously reconsider the conditionality rule
for foreign
aid disbursements.
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