Regime changes, economic policies and the effect of aid on growth

Abstract

This study finds that on average aid has little impact on economic growth, although a robust finding is that aid promotes growth only in a politically stable environment irrespective of the quality of the country's economic policies. Aid is ineffective in an unstable environment even in the presence of good policies. The results, however, indicate that policy is more effective in promoting growth when supported by increased aid flows rather than aid being more effective in good policy environment. The empirical results also provide some tentative support for the presence of an aid Laffer curve in the politically stable countries. The allocation of aid is found to be influenced by the country size and its state of development, rather than the quality of policy. © 2005 Taylor & Francis.