Foreign Aid

JEL codes - F35 - Foreign Aid

Q1: What are the most effective types of foreign aid in promoting economic growth and development in
Q2: How do recipient countries’ political systems and institutions impact the effectiveness of foreign aid
in achieving its intended objectives?
Q3: How do cultural differences between donor and recipient countries impact the design,
implementation, and outcomes of foreign aid programs?

Hypothetical title
1: The Effectiveness of Different Types of Foreign Aid in Promoting Economic Growth and
Development in Recipient Countries.
2: Impact of Political Systems and Institutions on Foreign Aid Effectiveness.
3: Cultural Differences and Foreign Aid Programs: Impacts on Design, Implementation, and Outcomes

study Analysi Independent Dependen covariates Methods Results

s level variable t variable

1 Maruta, A. A., Country Foreign aid, Economic Population The study The study suggests that
. Banerjee, R., & -level institutional growth growth, initial employs a foreign aid has a positive
Cavoli, T. (2020). analysis quality level of panel impact on economic
Foreign aid, economic regression growth in developing
institutional development, analysis countries, but this impact
quality and human capital, using a is dependent on the quality
economic and trade fixed of institutions in the
growth: Evidence openness effects recipient country.
from the model
but this effect is weaker in
developing
countries with high levels
world. Economic
of corruption
Modelling, 89,
444-463.

2 Dhahri, S., & Country Foreign Agricultur The article The The study finds that
. Omri, A. (2020). -level capital al controls for authors use foreign capital inflows
Does foreign inflows productio various a panel have a positive and
capital really n economic and data significant impact on
matter for the demographic regression agricultural production in
host country factors, such as analysis on developing countries. The
 agricultural GDP, a sample effect is particularly strong
production? population, of 57 for foreign direct
Evidence from human capital, developing investment (FDI) inflows,
developing and countries while portfolio investment
countries. Review infrastructure. over the inflows do not have a
of world period significant effect. The
economics, 156, 1985-2015. authors also find that the
153-181. positive impact of FDI on
agricultural production is
stronger in countries with
better economic and
institutional conditions.

3 Abouraia, M. K. Macro- Foreign aid Economic Various Panel data Positive and significant
. (2014). Impact of level developm economic and analysis impact of foreign aid on
foreign aid in ent in the institutional using economic development in
economic Philippine factors such as econometri the Philippines,
development of s GDP, inflation c conditional on the
developing rate, trade techniques presence of certain
countries: A case openness, such as economic and institutional
of Philippines. human capital, fixed- factors.
European Journal and political effects
of Business and stability. regression
Social Sciences, and
3(4), 166-180. Granger
causality
test.

4 Kim, J. (2011). Macro- Foreign aid Economic GDP, trade Panel data Positive and significant
. Foreign aid and level developm openness, analysis impact of foreign aid on
economic ent in education, and using economic development in
development: South political econometri South Korea, conditional
The success story Korea stability. c on the presence of certain
of South Korea. techniques economic and institutional
Pacific Focus, factors. Evidence of
26(2), 260-286. unidirectional causality
from foreign aid to
economic development.

5 Clemens, M. A., Country Types of Economic Country size, Regression The study found that
. Radelet, S., -level foreign aid growth level of analysis foreign aid for
Bhavnani, R., & analysis and development, infrastructure development
Bazzi, S. (2012). developm political and education has a
Counting ent in stability, significant positive impact
chickens when recipient corruption on economic growth in
they hatch: The countries recipient countries, while
short-term effect humanitarian aid and debt
of aid on growth. relief had mixed results
Economic (Clemens et al., 2012).
Letters, 117(1),
372-374.

1 article Summary

he relationship between foreign aid, institutional quality, and economic growth in

developing countries is a topic of significant interest for policymakers and scholars alike.
A recent study conducted a panel data regression analysis to investigate this
relationship, using a sample of 84 developing countries over the period 2000-2016. The
study found that foreign aid has a positive and significant effect on economic growth in
developing countries, but this effect is dependent on the quality of institutions in the
recipient countries.

The study used several measures of institutional quality, including the World
Governance Indicators and the Corruption Perceptions Index, to capture different
aspects of institutional quality. The analysis revealed that the positive impact of foreign
aid on economic growth is greater in countries with better institutional quality.
Furthermore, the study found that the effect of institutional quality on economic growth
is positive and significant, even after controlling for the impact of foreign aid.

The findings suggest that foreign aid can be an effective tool for promoting economic
growth in developing countries, but its effectiveness is dependent on the quality of
institutions in the recipient countries. Policymakers should prioritize improving
institutional quality in recipient countries as a means of increasing the effectiveness of
foreign aid. However, the study does not explore the specific mechanisms through
which institutional quality affects the impact of foreign aid on growth, leaving room for
future research in this area.

Overall, the study contributes to the existing literature by examining the interaction
between foreign aid and institutional quality in determining economic growth in
developing countries. The results provide important insights for policymakers and
researchers interested in understanding the relationship between foreign aid,
institutional quality, and economic growth in developing countries.
 Q2: How do recipient countries’ political systems and institutions impact the effectiveness of foreign aid
in achieving its intended objectives?
Hypothetical title
Impact of Political Systems and Institutions on Foreign Aid Effectiveness.

study Analysi Independent Dependent covariates Methods Results

s level variable variable

1 Dreher, A., Fuchs, A., & Country Political Effectivenes Economic Quantitat The study found that
Parks, B. C. (2015). Post- -level systems and s of foreign developmen ive democratic political
2015: setting the stage for institutions aid in t, analysis systems in recipient
a new era of sustainable in recipient achieving governance countries are positively
development. World countries intended indicators associated with the
Development, 66, 1-23. objectives effectiveness of foreign
aid. However, the quality
of institutions mediates
this relationship.

2 Dreher, A., Nunnenkamp, Country Political Effectivenes Economic Quantitat The study found that
P., & Thiele, R. (2011). -level systems and s of foreign developmen ive political instability in
Are ‘new’donors institutions aid in t, analysis recipient countries is
different? Comparing the in recipient achieving governance negatively associated with
allocation of bilateral aid countries intended indicators the effectiveness of
between non-DAC and objectives foreign aid in achieving
DAC donor countries. intended objectives.
World Development,
39(11), 1950-1968.

3 Fuchs, A., Dreher, A., & Country Political Effectivenes Economic Quantitat The study found that
Nunnenkamp, P. (2014). -level systems and s of foreign developmen ive recipient countries with
Determinants of donor institutions aid in t, analysis democratic political
generosity: A survey of the in recipient achieving governance systems and strong
aid budget literature. countries intended indicators, institutions tend to use
World Development, 56, objectives aid volume foreign aid more
172-199. effectively in achieving
intended objectives. The
quality of institutions also
mediates the relationship
between political systems
and the effectiveness of
foreign aid.
4 Knack, S., & Rahman, A. Country Political Effectivenes Economic Quantitat The study found that
(2017). Donor -level systems and s of foreign developmen ive political systems and
fragmentation and institutions aid in t, analysis institutions in recipient
bureaucratic quality in aid in recipient achieving governance countries are significant
recipients. World countries intended indicators, determinants of the
Development, 98, 365- objectives aid volume effectiveness of foreign
378. aid in achieving intended
objectives. However, the
impact of political systems
is context-specific and
varies depending on the
type of aid and sector.

5 Abouharb, M. R., & Country Political Effectivenes Economic The study found that the
Cingranelli, D. L. (2015). -level systems and s of foreign developmen effectiveness of foreign
Human rights and institutions aid in t, aid in achieving intended
structural adjustment in recipient achieving governance Quantitat objectives is influenced by
lending. World countries intended indicators, ive the quality of political
Development, 76, 1-16. objectives aid volume analysis institutions, the level of
political stability, and the
degree of government
corruption in recipient
countries. The
effectiveness of foreign
aid is also positively
associated with the level
of human development in
recipient countries.

3 Article summary

The article under review explores the determinants of donor generosity in the allocation
of foreign aid. The authors conduct a comprehensive survey of the aid budget literature
to identify factors that influence donor behavior and decisions. The study covers cross-
country and bilateral studies published between 1995 and 2012.
 The study identifies several key factors that influence donor generosity in the allocation
of aid. These factors include political interests, strategic considerations, recipient need,
and donor economic conditions. The authors find that donor generosity is positively
correlated with the recipient's need for aid, political alignment between the donor and
recipient, and donor economic conditions. They also find that donor generosity is
negatively correlated with recipient corruption and governance quality.

The results of the study suggest that the determinants of donor generosity are complex
and multifaceted. Donors are influenced by a range of factors, including political
interests, strategic considerations, and recipient need. The study emphasizes the
importance of recipient need in aid allocation decisions and the negative impact of
recipient corruption on aid flows.

However, the study identifies a gap in the literature on the impact of recipient
governance quality on donor generosity. The authors suggest that further research is
needed to examine the relationship between governance quality and aid allocation
decisions. The study also highlights the need for more research on the impact of
strategic considerations on donor behavior.

Overall, the study provides important insights into the factors that influence donor
generosity in the allocation of foreign aid. The results have significant implications for
policymakers and researchers interested in understanding the complex determinants of
aid allocation decisions.

Q3: How do cultural differences between donor and recipient countries impact the design,
implementation, and outcomes of foreign aid programs?
Hypothetical title
Cultural Differences and Foreign Aid Programs: Impacts on Design, Implementation, and Outcomes

study Analysi Independent Dependent covariates Methods Results

s level variable variable

1 Kim, S. (2013). Cross- Cultural Design of Economic Qualitative The study found that
Development country differences foreign aid development, analysis cultural differences
assistance as a analysis programs political between donor and
communication stability recipient countries can
process: Examining create challenges in
cultural differences designing foreign aid
in aid design. programs that are
 Journal of sensitive to local
International cultures and
Development, preferences (Kim,
25(6), 776-790. 2013).

2 Bastian, S. (2013). Case Cultural Implementatio Level of Qualitative The study found that
Understanding study differences n of foreign aid development, analysis cultural differences
culture in the analysis programs aid allocation between donor and
implementation of patterns recipient countries can
development lead to
projects: A case miscommunication and
study from misunderstandings
Indonesia. Journal during the
of Development implementation of
Effectiveness, 5(1), foreign aid programs
1-17. (Bastian, 2013).

3 Blair, H. (2016). Case Cultural Design of Economic Qualitative The study found that
Cultural diversity study differences foreign aid development, analysis cultural differences
and aid analysis programs political between donor and
programming: A stability recipient countries can
case study from the lead to the adoption of
Pacific. "one-size-fits-all"
Development approaches in
Policy Review, designing foreign aid
34(3), 359-377. programs, which may
not be effective

4 Winters, M. S. Case Cultural Implementatio Level of Qualitative The study found that
(2014). study differences n of foreign aid development, analysis cultural differences
Implementing analysis programs aid allocation between donor and
foreign aid projects patterns recipient countries can
in culturally lead to power
complex contexts. imbalances during the
Public implementation of
Administration and foreign aid programs,
Development, with donors often
34(1), 32-45. imposing their own
cultural norms and
values on recipient
countries (Winters,
2014).

5 Lee, C. (2015). The Cross- Cultural Implementatio Type of aid, Regression The study found that
impact of cultural country differences n of foreign aid level of analysis cultural differences
differences on aid analysis programs development between donor and
effectiveness: recipient countries can
Evidence from impact the
Korean aid to implementation of
Southeast Asia. foreign aid programs,
Journal of East or training rather than
Asian Studies, infrastructure or
15(2), 233-258. finance (Lee, 2015).

Article 2 summary
The article explores how cultural differences affect the implementation of development projects, focusing
on a case study from Indonesia. The study aims to identify cultural factors that influence project
implementation, understand how they impact the process and outcomes of the project, and propose ways
to improve cross-cultural communication and cooperation in development projects.
The article is based on a qualitative case study approach that includes interviews with project staff,
community members, and other stakeholders involved in the project. The study also uses document
analysis and field observations to gather data.
The study finds that cultural differences in language, values, and social norms create challenges in project
implementation, leading to misunderstandings, delays, and conflicts. The study also identifies cultural
factors that facilitate successful project implementation, such as building trust and rapport with local
communities, using local knowledge and expertise, and adapting project design to local contexts. The
study concludes with recommendations for improving cross-cultural communication and cooperation in
development projects.
The results of the study suggest that cultural differences play a significant role in shaping the
implementation and outcomes of development projects. The study highlights the importance of cultural
sensitivity and awareness in project design and implementation, as well as the need for effective cross-
cultural communication and cooperation.

Research gap:
The article contributes to the growing body of literature on culture and development by providing insights
into how cultural differences impact project implementation and outcomes. However, the study focuses
on a single case study from Indonesia, which limits the generalizability of the findings. Further research is
needed to explore the role of culture in development projects in different contexts and settings.
 The Effectiveness of Different Types of Foreign Aid in Promoting Economic Growth and
Development in Recipient Countries

Literature review

Alesina and Dollar investigated the factors that affect foreign aid flow from developed to developing
countries using panel data covering 130 recipient countries from 1970 to 1992. They found that foreign
aid is positively associated with the recipient's need for aid and past economic performance. However,
they also discovered that foreign aid is influenced by the donor country's political and strategic interests,
such as the recipient's geostrategic importance, alignment with the donor country, and the donor's military
and economic interests in the recipient country. The authors concluded that while foreign aid can promote
economic development, its effectiveness depends on its allocation and utilization.
In their study, Burnside and Dollar investigate the correlation between foreign aid and economic growth
in 56 developing countries from 1970 to 1993. Their findings reveal that foreign aid has a favorable
impact on economic growth solely in nations with strong policy frameworks, characterized by good
institutions and macroeconomic policies. Conversely, foreign aid has no impact or even a negative impact
on growth in countries with inadequate policies. The authors assert that foreign aid can promote economic
development effectively only when it is granted within a context of good governance and robust
economic policies..
In his article published in the Journal of Economic Perspectives, Easterly evaluates the impact of foreign
aid on economic growth by analyzing the existing empirical literature. He concludes that there is little
evidence to support the notion that aid effectively promotes economic development, and attributes this to
factors such as corruption, inadequate institutions, and unsuitable policies that result in misallocation or
misuse of aid. Additionally, Easterly argues that foreign aid can lead to perverse incentives and
undermine accountability in recipient countries. He proposes that aid should only be provided to countries
that have a track record of good governance and economic reform, and should be targeted towards
specific interventions that have proven to be effective.
In her book "Dead Aid," Moyo critiques the efficacy of foreign aid in promoting economic development
in Africa. She argues that aid has not led to sustainable growth or poverty reduction and has instead
fostered a culture of dependency, corruption, and rent-seeking. Moyo believes that aid has also hindered
private investment and entrepreneurship, distorted market incentives, and undermined accountability and
governance in African countries. She suggests that the continent should shift towards private sector-led
growth, trade, and investment as the
Ndulu, O'Connell, and Bates' book "The Political Economy of Economic Growth in Africa, 1960-2000"
provides a thorough examination of the factors contributing to Africa's economic underperformance over
the past four decades. They argue that issues such as weak institutions, poor governance, inadequate
infrastructure, and external constraints have hindered economic growth in many African countries. While
foreign aid is recognized as having played a role in African development, the authors suggest that its
impact has been limited and often negatively impacted by political and economic distortions. Instead, the
authors propose that private investment and entrepreneurship should be prioritized as the primary drivers
of economic development in Africa, with a gradual reduction in reliance on foreign aid.
Boone's article investigates the relationship between politics and aid effectiveness in Sub-Saharan Africa.
Using data from 29 aid-receiving countries between 1970 and 1992, Boone shows that aid is most
effective in democratic countries with stable political environments. He also finds that aid effectiveness
diminishes significantly in countries with authoritarian regimes or frequent coups. Boone concludes that
the effectiveness of aid is influenced not only by its quantity and quality, but also by the political context
in which it is provided and whether it aligns with the recipient's development goals.
Clemens, Radelet, and Bhavnani investigate the immediate effect of foreign aid on economic growth in
developing countries using data from 1970 to 2000. Their analysis reveals that while aid has a positive
impact on growth in the short term, the effect is not significant and disappears when measured per capita.
They conclude that aid has diminishing returns and may not be able to address the underlying structural
constraints that impede growth in recipient countries.

Gap
The common gap in the above mentioned literature reviews is the lack of focus on the perspectives and
experiences of the aid recipients themselves. The literature primarily focuses on the effectiveness and
impact of foreign aid from the donor's point of view, without adequately considering the perspectives and
agency of the recipient countries and their citizens. This gap limits our understanding of how foreign aid
can be made more effective and beneficial for the recipient countries and their development.

Research proposal

Enhancing the Effectiveness of Foreign Aid in Promoting Economic Growth: The Role of Good
Governance and Policy Frameworks

Introduction

Foreign aid is a critical source of financial support for developing countries, particularly in Africa,
where many countries struggle with underdevelopment, poverty, and economic growth. However,
despite the significant amount of foreign aid that has been given to these countries, there is still debate
about its effectiveness in promoting economic growth. Scholars have identified several factors that
contribute to the success or failure of foreign aid, including good governance and strong policy
frameworks. This proposed study aims to investigate the role of good governance and policy
frameworks in enhancing the effectiveness of foreign aid in promoting economic growth.

The rationale for this study is to contribute to the ongoing debate on the effectiveness of foreign aid in
promoting economic growth in developing countries. While previous studies have highlighted the
importance of good governance and policy frameworks in the success of foreign aid, there is a need for
more research in this area to better understand how these factors contribute to aid effectiveness. By
focusing on these factors, this study aims to provide insights into how foreign aid can be better allocated
and utilized to promote economic growth.

The significance of this study lies in its potential to inform policies and practices related to foreign aid
allocation and utilization. If the study finds that good governance and policy frameworks are essential
for aid effectiveness, it could provide policymakers with recommendations on how to improve the
allocation and utilization of aid. Moreover, the study could also highlight the importance of investing in
good governance and policy frameworks in recipient countries to ensure aid effectiveness in promoting
economic growth.

The scope of this study will be limited to developing countries in Africa. The study will draw on existing
literature on foreign aid effectiveness, good governance, and policy frameworks, as well as statistical
analysis of panel data covering a period from 1970 to 2021. The study will be guided by several
objectives and hypotheses that will be developed based on the literature review and conceptual
framework.

Title

Enhancing the Effectiveness of Foreign Aid in Promoting Economic Growth: The Role of Good
Governance and Policy Frameworks

Research Question
How can good governance and policy frameworks enhance the effectiveness of foreign aid in
promoting economic growth in developing countries?

Objectives/Hypothesis of the Study

To assess the impact of good governance and policy frameworks on the effectiveness of foreign
aid in promoting economic growth.

1. To identify the most effective strategies for allocating and utilizing foreign aid to achieve
development objectives.
2. To investigate the relationship between foreign aid, good governance, policy frameworks, and
economic growth.

Literature Review

Alesina and Dollar investigated the factors that affect foreign aid flow from developed to
developing countries using panel data covering 130 recipient countries from 1970 to 1992. They found
that foreign aid is positively associated with the recipient's need for aid and past economic performance.
However, they also discovered that foreign aid is influenced by the donor country's political and strategic
interests, such as the recipient's geostrategic importance, alignment with the donor country, and the
donor's military and economic interests in the recipient country. The authors concluded that while foreign
aid can promote economic development, its effectiveness depends on its allocation and utilization.
In their study, Burnside and Dollar investigate the correlation between foreign aid and economic
growth in 56 developing countries from 1970 to 1993. Their findings reveal that foreign aid has a
favorable impact on economic growth solely in nations with strong policy frameworks, characterized by
good institutions and macroeconomic policies. Conversely, foreign aid has no impact or even a negative
impact on growth in countries with inadequate policies. The authors assert that foreign aid can promote
economic development effectively only when it is granted within a context of good governance and
robust economic policies..
In his article published in the Journal of Economic Perspectives, Easterly evaluates the impact of
foreign aid on economic growth by analyzing the existing empirical literature. He concludes that there is
little evidence to support the notion that aid effectively promotes economic development, and attributes
this to factors such as corruption, inadequate institutions, and unsuitable policies that result in
misallocation or misuse of aid. Additionally, Easterly argues that foreign aid can lead to perverse
incentives and undermine accountability in recipient countries. He proposes that aid should only be
provided to countries that have a track record of good governance and economic reform, and should be
targeted towards specific interventions that have proven to be effective.
In her book "Dead Aid," Moyo critiques the efficacy of foreign aid in promoting economic
development in Africa. She argues that aid has not led to sustainable growth or poverty reduction and has
instead fostered a culture of dependency, corruption, and rent-seeking. Moyo believes that aid has also
hindered private investment and entrepreneurship, distorted market incentives, and undermined
accountability and governance in African countries. She suggests that the continent should shift towards
private sector-led growth, trade, and investment as the
Ndulu, O'Connell, and Bates' book "The Political Economy of Economic Growth in Africa, 1960-
2000" provides a thorough examination of the factors contributing to Africa's economic
underperformance over the past four decades. They argue that issues such as weak institutions, poor
governance, inadequate infrastructure, and external constraints have hindered economic growth in many
African countries. While foreign aid is recognized as having played a role in African development, the
authors suggest that its impact has been limited and often negatively impacted by political and economic
distortions. Instead, the authors propose that private investment and entrepreneurship should be
prioritized as the primary drivers of economic development in Africa, with a gradual reduction in reliance
on foreign aid.
Boone's article investigates the relationship between politics and aid effectiveness in Sub-Saharan
Africa. Using data from 29 aid-receiving countries between 1970 and 1992, Boone shows that aid is most
effective in democratic countries with stable political environments. He also finds that aid effectiveness
diminishes significantly in countries with authoritarian regimes or frequent coups. Boone concludes that
the effectiveness of aid is influenced not only by its quantity and quality, but also by the political context
in which it is provided and whether it aligns with the recipient's development goals.
Clemens, Radelet, and Bhavnani investigate the immediate effect of foreign aid on economic
growth in developing countries using data from 1970 to 2000. Their analysis reveals that while aid has a
positive impact on growth in the short term, the effect is not significant and disappears when measured
per capita. They conclude that aid has diminishing returns and may not be able to address the underlying
structural constraints that impede growth in recipient countries.

Conceptual Framework
 The conceptual framework for this research will be based on the aid effectiveness framework,
which emphasizes the importance of good governance and strong policy frameworks in aid
effectiveness.

Research Design

This research will use a mixed-methods approach, including both qualitative and quantitative
methods. The qualitative component of the study will involve in-depth interviews with policymakers and
practitioners, while the quantitative component will involve regression analysis and other statistical
methods.

Methodology

The data for this research will be collected from primary and secondary sources. The primary
data will be collected through in-depth interviews with policymakers and practitioners, while the
secondary data will be collected from existing literature and data sources.

Expected outcomes
This research is expected to provide insights into how good governance and policy frameworks
can enhance the effectiveness of foreign aid in promoting economic growth. The findings of this research
will inform policymakers and aid agencies on how to allocate and utilize aid effectively to promote
economic development in developing countries.

Limitations of the Study

One of the main limitations of this research is that it will only cover a period of 10 years, which
may not be sufficient to capture the long-term impact of foreign aid on economic growth. Furthermore,
the study may be limited by the availability and quality of data.

List of References

Alesina, A., & Dollar, D. (2000). Who Gives Foreign Aid to Whom and Why?. Journal of Economic Growth,
5(1), 33-63.

Burnside, C., & Dollar, D. (2000). Aid, Policies, and Growth. American Economic Review, 90(4), 847-868.

Clemens, M. A., Radelet, S., & Bhavnani, R. R. (2004). Counting Chickens When They Hatch: The Short-
Term Effect of Aid on Growth. Center for Global Development Working Paper No. 44.

Easterly, W. (2003). Can Foreign Aid Buy Growth?. Journal of Economic Perspectives, 17(3), 23-48.

Moyo, D. (2009). Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa. Farrar,
Straus and Giroux.

Ndulu, B., O'Connell, S. A., & Bates, R. H. (2008). The Political Economy of Economic Growth in Africa,
1960-2000. Cambridge University Press.

Boone, P. (1996). Politics and the Effectiveness of Foreign Aid. European Economic Review, 40(2), 289-
329.