Dowling and Hiemenz (1982) tested the aid-growth relationship for the Asian region on 13countries using pooled data and found a positiveand significant impact of aid on growth. Singh(1985) obtained similar results for a wider sampleof 73 countries during 1960-70 and 1970-80(particularly in the later period). More recentlyHadjimichael et al. (1995) found positive evidencefor the period 1986 to 1992 using a sample of 41countries. Their model is more sophisticated thanmost predecessors by attempting to capture potential side effects of foreign aid and other policy variables that are hypothesized to affectgrowth.Murty, Ukpolo and Mbaku (1994) found that per capital real gross domestic product, the saving rateand aid were cointegrated and aid had positive longrun effects in Cameroon during 1970-1990. Usinga Autoregressive Distributed Lag (ARDL) model,Gounder (2001) found that aid had a positive andsignificant effect on growth in Fiji. Gomanee,Girma, and Morris say (2005) addressed directlythe mechanisms via which aid impacts growth.Using a sample of 25 Sub-Saharan Africancountries over the period 1970 to 1997, the authorsdetermined that foreign aid had a significant positive effect on economic growth. Karras (2006)investigated the correlation between foreign aidand growth in per capital GDP using annual datafrom 1960 to 1997 for a sample of 71 aid-receivingdeveloping countries. The study concluded that theeffect of foreign aid on economic growth was positive, permanent, and statistically significant.The relationship between foreign aid and economicgrowth was investigated by Hatemi-J and Irandoust(2005) for a panel of developing countries(Botswana, Ethiopia, India, Kenya, Sri-Lanka, andTanzania) over the period 1974-1996. The resultsrevealed that the variables contained a panel unitroot and they cointegrated in a panel perspective.The long-run elasticities showed that foreign aidhad a positive and significant effect on economicactivity for each country in the sample.However, challenging the assumption that foreigncapital inflows add to capital formation withoutdisturbing domestic saving and consumption,Griffin (1970), Giffin and Enos (1970), Weisskopf (1972), Areskoug (1976) criticized the simplisticfindings of others and emphasized that not all aid
was an increment to the capital stock of LDC‟s,
since some aid was diverted for consumption purposes. Griffin and Enos (1970) found thatforeign aid had neither accelerated growth nor helped towards faster democratic political regimes.Foreign aid, at least in some countries, mightimpair rather than promote growth. If anything, aidmight have retarded development by leading tolower domestic saving by distorting thecomposition of investment and thereby raising thecapital-output ratio, by frustrating the emergenceof an indigenous entrepreneurial class and byinhibiting institutional reforms. It was further suggested that foreign aid increased consumption,and thus reduced the savings rate. Mosley (1980)found a negative relationship between foreign aidand growth in his 83 LDC case and a positiverelationship for growth for the 37 countries byusing TSLS.
Mosley, Hudson and Horrell (1987), for 60 LDC‟s
in three periods 1960-70, 1970-80, 1980-83,considered the apparent effectiveness of foreignaid in the light of a model which decomposed theimpact of foreign aid into three different
component parts. These were “
the direct effects of
the aid disbursement”, “indirect effects on the
spending pattern of the public sector of the
recipient country “, and
lastly the effect of foreignaid on the prices of some good,
“raises the prices
of some goods, depresses the price of some othersand hence has side effects
on the price system”.
Their results again showed a poor performance for aid in generating growth and failed to show thataid had a positive effect on growth.Boone (1996) for the first time analyzed the macroeconomic impact of aid in a neoclassical growthmodel. He looked at fungibility issues in a standardgrowth model with productive public expenditure