Growth, Debt Burdens and Alleviating Effects of Foreign Aid in Least Developed Countries

Bjerg, Christina; Bjørnskov, Christian; Holm, Anne

doi:10.2139/ssrn.995265

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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

See all articles by Christina Bjerg

Christina Bjerg

Aarhus University - School of Business and Social Sciences

Christian Bjørnskov

Aarhus University - Department of Economics and Business; Research Institute of Industrial Economics (IFN); Center for Political Studies; Institute for Corruption Studies

Anne Holm

affiliation not provided to SSRN

Date Written: January 2007

Abstract

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

Bjerg, Christina and Bjørnskov, Christian and Holm, Anne, Growth, Debt Burdens and Alleviating Effects of Foreign Aid in Least Developed Countries (January 2007). Aarhus School of Business Department of Economics Working Paper No. 07-1, Available at SSRN: https://ssrn.com/abstract=995265 or http://dx.doi.org/10.2139/ssrn.995265