Does Foreign Aid Contribute to HDI Improvement?

Abstract

Foreign aid is aimed at creating a favourable environment capable to foster economic growth and development in poorer countries. Accordingly, recipient countries might rely to a certain extent on external aid to attaint higher welfare levels. In principle, donour’s aid-allocation preference, aided country policies, its institutional background, and economic environment are decisive in the aid effectiveness. Should not the previous conditions be met, could the country fall into the poverty trap. Contrary to a large strand of the literature measuring the role external funding has with regards to its contribution to welfare and growth, we show that Human Development Index is positively driven by internal factors, whilst foreign aid, and private funding have no significant effect. This is coherent with a more recent strand of the literature, suggesting that on average, aid is ineffective in recipient countries. JEL classification numbers: F35, H20, H83, O1. Keywords: Foreign Aid, HDI improvement, Developing Countries.