On Aid, Growth, and Good Policies

This paper provides a critical analysis of the growth regressions in Burnside and Dollar (2000). First, we analyze the relation between aid and government expenditure in a modified neoclassical growth model. We find that while good policies spur growth they may at the same time lead to decreasing effectiveness of foreign aid. Second, we show that the econometric results in Burnside and Dollar emphasizing the crucial role of interactions between aid and good policies in the growth process are fragile, being extremely data dependent. Finally, we demonstrate that the Burnside and Dollar data lends support to the idea that the association between aid and growth can be approximated by decreasing returns to aid. This finding conforms well to regression results in other recent studies. Outline