Foreign Aid and Long Term Prospects of Recipients

Abstract

The central role of institutions in economic growth and international disparities has been recognized in the last two decades. This paper examines the effect of foreign aid in the form of grants and concessional loans on economic institutions. It uses a sample of 127 recipient countries. Institutional data from Doing Business database are employed. Three alternative control variables, including a per capita income variable, are used. We show foreign aid worsens institutions, though this effect is small. Donor countries will be well-advised to design their aid programs to focus on institutions while recipients need to improve their institutions so that foreigners’ charity is not wasted.

Keywords: Foreign Aid, Institutions

JEL Classification: F35, O43