Foreign Aid and Market-Liberalizing Reform

35 Pages Posted: 22 Apr 2005

See all articles by Jac C. Heckelman

Jac C. Heckelman

Wake Forest University - Department of Economics

Stephen Knack

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: April 2005

Abstract

Market-oriented economic policies - reflected in limited economic activity by government, protection of private property rights, a sound monetary policy, outward orientation regarding trade and efficient tax and regulatory policy - have been strongly linked to faster rates of economic growth. Foreign aid is often provided in the belief that it encourages liberalizing reforms in these areas. This paper analyzes the impact of aid on market-liberalizing policy reform, correcting for the possible endogeneity of aid. 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 significantly linked to slower reform in some policy areas but not in others. Disaggregating by decade, aid's adverse impact on policy reform is much more pronounced for the 1980s than for the 1990s.

JEL Classification: O10, O19

Suggested Citation

Heckelman, Jac C. and Knack, Stephen, Foreign Aid and Market-Liberalizing Reform (April 2005). Available at SSRN: https://ssrn.com/abstract=708421

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)
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HOME PAGE: http://www.wfu.edu/~heckeljc/jac.htm

Stephen Knack

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

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States
202-458-9712 (Phone)

HOME PAGE: http://econ.worldbank.org/staff/sknack

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