New CGD Researchers' Paper Calls for More Research on Aid Effectiveness
August 13, 2003
by William Easterly, Ross Levine, David Roodman
Craig Burnside's and David Dollar's article in the American Economic Review on "Aid, Policies, and Growth" (2000) reaches the conclusion that aid raises growth in a good policy environment, a result which has received considerable attention and won many adherents in development-policy circles. A new paper by Center for Global Development researchers William Easterly and David Roodman and the University of Minnesota's Ross Levine expands on Burnside's and Dollar's work, but nevertheless finds that "economists and policymakers should be less sanguine about concluding that foreign aid will boost growth in countries with good policies."
By using the original sources for the data from Burnside's and Dollar's study, Easterly, Levine, and Roodman expanded the original data set's 1970-93 coverage to 1997, increasing the number of observations by more than a quarter.
The Burnside and Dollar study regresses per capita GDP against several variables, including a term for the interaction between foreign development assistance received by a developing country, and the quality of economic policies in the recipient state: This variable lies at the root of Burnside's and Dollar's aid-effectiveness claims, namely that states maintaining a balanced fiscal policy, a low inflation rate, and an open trade policy yield more economic growth per unit of development aid than states not pursuing such policies.
Burnside's and Dollar's analysis produces a statistically significant coefficient for the aid-policy interaction term: By contrast, the new paper -- running the same regression on a larger data set -- does not.
In light of their new results -- which will themselves appear in an upcoming issue of the American Economic Review -- Easterly, Levine, and Roodman view Burnside and Dollar (2000) as "a seminal paper that stimulates additional work on aid effectiveness, but not yet the final answer on this critical issue."
For the data used in this study, see the "Research Data" page at the CGD wesbite.
Link: http://www.cgdev.org/wp/cgd_wp026.pdf [602 KB PDF]
Keywords: Burnside, Dollar, Easterly, Levine, Roodman, aid effectiveness, growth, policy, institutions