Critics of foreign aid programs have long argued that poverty reflects government failure. In this paper I analyze the effectiveness of foreign aid programs to gain insights into political regimes in aid recipient countries. My analytical framework shows how three stylized political/economic regimes labeled egalitarian, elitist and laissez-faire would use foreign aid. I then test reduced form equations using data on nonmilitary aid flows to 96 countries. I find that models of elitist political regimes best predict the impact of foreign aid. Aid does not significantly increase investment and growth, nor benefit the poor as measured by improvements in human development indicators, but it does increase the size of government. I also find that the impact of aid does not vary according to whether recipient governments are liberal democracies or highly repressive. But liberal political regimes and democracies, ceteris paribus, have on average 30% lower infant mortality than the least free regimes. This may be due to greater empowerment of the poor under liberal regimes eve though the political elite continues to receive the benefits of aid programs. An implication is that short term aid targeted to support new liberal regimes may be a more successful means of reducing poverty than current programs.

Politics and the Effectiveness of Foreign Aid

https://www.nber.org/system/files/working_papers/w5308/w5308.pdf

Politics and the effectiveness of foreign aid

There is a widespread perception among academic researchers and aid practitioners alike that empirical cross-country analysis fails to find any significant link between aid flows and growth, and that aid is successful only when associated with good policies in the recipient countries. These positions do not stand up to careful scrutiny of existing studies. In this paper, we offer a re-examination of the literature on the aid-savings, aid-investment, and aid growth relationships, and a comparative appraisal of more recent research contributions. Using an analytic framework for evaluating the empirical work, a coherent and positive picture of the aid-growth link emerges. Aid works, even in countries hampered by an unfavorable policy environment.

/pdf/aid-effectiveness-disputed-ulix5bgg4p.pdf

Aid effectiveness disputed

Cross-country regression analysis is applied to thirty-four countries for the 1950s and fifty-one countries for the 1960s. When foreign aid, foreign investment, other inflows and domestic savings are treated as separate independent variables: (a) savings and foreign inflows explain over a third of growth; (b) foreign aid has a substantially greater effect than the other variables; (c) correlation between aid and foreign private investment is not significant; (d) only for Asia do the four variables explain much; and (e) growth is not correlated with exports, education, per capita income, or country size. Savings are highly correlated with exports and per capita income, not with country size.

Aid, Foreign Private Investment, Savings, and Growth in Less Developed Countries

Export expansion and economic growth

For nearly two decades discussions of Latin American development have focused on problems of structural imbalance and their possible cures. Prebisch (1950) began the discussion when he argued that continued dependence on primary exports would place limits on further Latin American growth. While those limits appear to have been real, especially for exporters of tropical agricultural products, the alternative then advocated by Prebisch and pursued throughout Latin America-import substitution through industrialization-has run into increasing difficulties. Industrial growth, despite protection and other preferential policies, has been no more rapid in Latin America than in other parts of the world.' Apart from initial spurts due to import substitution, it has been limited by the slow growth of the other sectors of the economy. This experience points to the need for a more comprehensive analytical framework in designing development policies. In concentrating too heavily on one of the factors limiting growth, the import substitution policy has merely replaced one set of bottlenecks with another. To avoid a wasteful repetition of this process,2 it is necessary to establish a more compre-

Peter Eckstein

Papers

Development Alternatives for Latin America