Does foreign aid really help poor countries? New paper explores that question


In seeking to eradicate world poverty as put down within the UN's Sustainable Development Goals (SDGs), it is important to measure the impact of international capital flowing into poor countries. Do these inflows lead to faster rates of economic growth?

Professor of Economic Sciences Graham Bird and graduate student Yongseok Choi attempt to answer this inside a forthcoming paper within the Review of Development Economics.

Bird, who serves as the deputy director of the Claremont Institute for Economic Policy Studies (CIEPS), explained that they produced this paper because \”what is required is hard evidence that is presented without the subjective biases that often encroach into discussions of issues for example foreign aid.\”

In their paper, Bird and Choi use an econometric model to investigate the results on economic development of three types of international capital: remittances, foreign direct investment, and foreign aid. They use a sample of 51 developing economies over the period 1976-2021.

What are their results?

Overall they discover that FDI includes a significant positive effect, the effects of aid are largely insignificant, which remittances have a generally small but significant negative effect. But, Bird added, \”our results have to be interpreted with caution. You can easily draw the incorrect conclusions.\”

The principal impact of remittances is almost certainly on contemporary well-being, supporting higher levels of consumption. They're also accustomed to finance purchase of education, health insurance and housing. The results may take years before showing up in the form of faster economic growth. In the short term remittances may stoke up inflation that weakens competitiveness and could reduce the incentive to work-it may be these effects that adversely affect short-term growth.

Similar caution is required when assessing the impact of foreign aid.

\”Foreign aid,\” Bird said, \”takes various forms and it is impact depends on contingent circumstances and the way that is used.\” When Bird and Choi break down their data, they find plenty of examples by which aid has significantly helped economic growth.

Research based at CIEPS has a long tradition of involving graduate students in work, especially in the field of international money and finance, that contributes to resolving important global problems. Bird highlights the need to extend current research to discover the mechanisms through which remittances and aid exert their impact. Together with future generations of doctoral students, these is going to be issues that CIEPS is constantly on the explore.

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