Foreign Aid and Market-Liberalizing Reform

25 Pages Posted: 17 Jul 2008

See all articles by Jac C. Heckelman

Jac C. Heckelman

Wake Forest University - Department of Economics

Stephen Knack

World Bank - Development Research Group (DECRG)

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Market-oriented economic policies have been strongly linked to faster rates of economic growth. Foreign aid is often provided in part to encourage market-oriented reforms. We analyse the impact of aid on market-liberalizing policy reform, correcting for its potential endogeneity. Results indicate that higher aid slowed reform over the 1980–2000 period, as measured by a broad index of policies. Disaggregating policy into five areas, aid is associated with slower reform in some policy areas but not in others. Disaggregating by decade, the adverse impact of aid on policy reform is much more pronounced for the 1980s than for the 1990s.

Suggested Citation

Heckelman, Jac C. and Knack, Stephen, Foreign Aid and Market-Liberalizing Reform. Economica, Vol. 75, No. 299, pp. 524-548, August 2008, Available at SSRN: or

Jac C. Heckelman (Contact Author)

Wake Forest University - Department of Economics ( email )

P.O. Box 7505
Winston-Salem, NC 27109
United States
(336) 758-5923 (Phone)
(336) 758-6028 (Fax)


Stephen Knack

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
Washington, DC 20433
United States
202-458-9712 (Phone)


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