Growth, Debt Burdens and Alleviating Effects of Foreign Aid in Least Developed Countries
Aarhus School of Business Department of Economics Working Paper No. 07-1
31 Pages Posted: 26 Jun 2007
Date Written: January 2007
In this paper, we explore the potential growth effects of foreign aid when in conjunction with severe debt problems. We first argue that aid, when used to finance debt repayments, does not lead to Dutch Disease while still alleviating an economic problem. A set of empirical estimates show that while inflows of foreign aid in general are not associated with growth in a sample of 38 Least Developed Countries, an interaction term with the level of external debt is significant. We take this as suggestive evidence of an alleviating effect of aid in these countries and offer some tentative thoughts on the implications for future aid policies.
Keywords: Economic growth, foreign aid, external debt
JEL Classification: O40, F34, F35
Suggested Citation: Suggested Citation