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An Aid or a Boon? Measuring Foreign
floundered with the continued receipt or
Assistance’s Contribution to Economic
withdraw of foreign assistance. Does foreign
Growth in Less Developed Countries
P. Brian Bartels
Introduction.
Foreign assistance, defined as the
assistance contribute to economic growth in less
developed countries?
Modern foreign assistance arose from
the ashes of the Second World War with the
transfer of resources from one government to
United States’ implementation of the Marshall
another without expectation of repayment or
Plan for Europe’s reconstruction. Policymakers
reciprocation (Abbot 1970), represents a
in the United States believed the best way to
substantial annual flow of international capital.
assist Europe in restoring its economy was to
According to the World Bank (1999), in 1997
provide capital and technical assistance to
alone over forty-eight billion dollars was
rebuild European infrastructure. Economists
transferred between countries in the form of
and political scientists followed the progress of
foreign assistance. Donors provide foreign
the Marshall plan, took notice of its success, and
assistance to less developed countries for a
formulated lessons to apply to other
variety of reasons, including temporary famine
underdeveloped areas. Capital’s critical role in
relief, natural disaster clean-up operations,
catalyzing economic growth became the central
macroeconomic stabilization, political support,
lesson of the Marshall Plan. Throughout the
education initiatives, infrastructure creation,
1950s and into the 1960s scholars and
environmental protection, and other
development practitioners focused on capital’s
development projects. At bottom, ceteris
ability to ignite economic growth and foster
paribus, donors of foreign assistance intend to
development. Research primarily focused on
foster and promote broad-based economic
how capital shortages in less developed
growth that can be sustained in the long-term by
countries inhibited broad-based economic
the recipient. Donors hope to encourage long-
development. Foreign assistance became the
term domestically sustainable economic growth
mechanism of choice to address capital
in the recipient country by providing near-term
deficiencies, thus spurring economic growth.
economic assistance. However, the actual
Providing sufficient amounts of capital to a
practice of international foreign assistance
stagnant economy would create the necessary
indicates mixed results in its ability to foster
conditions for long-term, broad-based economic
sustainable long-term economic growth in
growth to occur. Thus, using Europe’s growth
recipient countries. Some recipients have
experience under the Marshall Plan as a model
achieved high levels of sustained economic
for development, developed countries
growth, while economies of other countries have
inaugurated foreign assistance programs to
foreign assistance expenditures. Negative, often
channel capital to developing economies.
inaccurate public perceptions of foreign
The Cold War skewed foreign assistance
assistance, domestic budget constraints,
practices in the United States, Soviet Union, and
recessions, and a general feeling of apathy
other developed countries. The onset and
toward foreign affairs contributed to the decline
entrenchment of the Cold War shifted
of foreign assistance in developed countries. By
policymaker’s motives for foreign assistance
the end of the 1990s, real foreign assistance
away from catalyzing economic growth and
expenditures had fallen to levels seen decades
toward developing strategic political and
before.
military allegiances. Specifically, the United
The contribution of foreign assistance to
States shifted foreign assistance expenditures
economic growth varies along a host of
from less developed countries truly needing
variables. Some regions of the world, such as
foreign assistance, choosing instead to “reward”
Southeast Asia, experience tremendous growth
loyalty and allegiance to countries sympathetic
and development with the introduction of
and committed to the United States’ ideologies
foreign assistance while economies of other
and policies. Similarly, the Soviet Union shifted
areas, such as Africa, seem to stagnate or even
its foreign assistance expenditures toward its
decline in the presence of foreign assistance.
allies and less developed countries it believed
The population of a recipient country also
could be lured into aligning with the Soviet
affects the utilization of foreign assistance.
Union against the United States. The Cold War
Some small countries utilize foreign assistance
altered the incentive structure for providing
effectively while others do not, just as some
foreign assistance. Instead of viewing foreign
large countries employ foreign assistance
assistance as a critical opportunity to promote
efficiently while others do not. Foreign
development, donors perceived foreign
assistance’s achievement record in promoting
assistance as a critical foreign policy and
human development and economic growth is
military tool to be wielded for strategic
fraught with inconsistencies. Ultimately, foreign
geopolitical purposes.
assistance has been a success for a number of
During the 1980s and 1990s, as the Cold
countries at one period while, at other times, it
War concluded and the need for strategic
has caused immense economic and human
expenditures diminished, the United States,
hardship.
Soviet Union, and other foreign assistance
Studying the effects of foreign
donors once again altered their donation
assistance on economic growth in less developed
behavior. Governments in developed economies
countries is important for three reasons. First,
consistently and systematically diminished their
the large annual funding developed countries
allocate to foreign assistance1 necessitates an
political issue. Foreign assistance expenditures
examination of the effectiveness of assistance
are politically sensitive, with constituents in
inflows in achieving long-term sustainable
major developed countries strongly opposing aid
economic growth. Developed countries provide
to other nations (Graham and O’Hanlon 1997;
foreign assistance to less developed countries as
The Economist 23 March 1996). Overall, most
a form of investment. Donors hope to ignite the
citizens of donor countries perceive foreign
process of long-term economic growth by
assistance in negative terms (Smillie 1998),
providing the catalyst, resources, to less
viewing it as a major component of central
developed countries. The expectation is that
government budget allocations. Negative views
recipients will spend and invest foreign
of foreign assistance persist for a number of
assistance wisely in a manner that fosters and
reasons, including misinformation and distortion
nurtures development and economic growth.
by the media, ethnocentrism, tax fears, and a
Determining if the controlling principles and
belief that foreigners should be responsible for
goals of foreign assistance are being met
and solve their own problems domestically. The
requires an in-depth study of whether or not
electorates of donor countries do not examine
foreign assistance actually acts as a positive
the long-term, positive effects foreign assistance
force in fostering economic growth in less
can elicit in less developed countries; instead,
developed countries. Donors of foreign
they think narrowly and look at the short-term
assistance require concrete data on the
costs to themselves and their own countries.
effectiveness of aid to ensure their contributions
Although foreign assistance may be effective
are being spent efficiently and in a manner
and desperately needed by less developed
consistent with their intent. Examining the
countries, the perpetual negative perceptions of
effectiveness of foreign assistance in initiating
foreign assistance make alterations and additions
economic growth provides donor countries with
to foreign assistance budgets extremely
definite evidence of the effects of their
troublesome. Opponents of foreign assistance
contributions, which can be used to make
can easily mobilize popular opinion whenever
rational decisions in future foreign assistance
foreign assistance matters arise, rendering
expenditures.
foreign assistance a delicate political operation.
Determining the effect foreign
Determining the effectiveness of foreign
assistance exerts on economic growth in less
assistance on economic growth in less developed
developed countries is also an important
countries provides the opportunity to establish
balanced, empirical reasons to support, oppose,
1
For a list of contributors and amounts, see “Aid
flows from Development Assistance Committee
Members.” 1999 World Development Indicators.
World Bank: 1999.
or alter foreign assistance packages and their
implementation. Ascertaining the actual
economic experiences of foreign assistance
policies become framed in reference to foreign
recipients and publicly disseminating the
assistance. That is, foreign assistance becomes
information provides an excellent opportunity to
the primary impetus and focus for development
educate electorates on the need and effects of
policy. Unfortunately, such heavy reliance on
foreign assistance. Foreign assistance could
foreign assistance may be unsubstantiated or
become de-politicized and publicly legitimated
incompatible with more effective alternatives.
by empirically demonstrating the actual effect
Less developed countries may adopt a policy
foreign assistance has on the development
course that firmly relies on foreign assistance,
experience of less developed countries.
even though the effects of foreign assistance are
Finally, the effect foreign assistance has
unproven and not the most desirable policy
on economic growth in less developed countries
prescription. These countries may also choose a
must be studied to determine the course
foreign assistance-based development strategy
economic policies should take in these countries.
that blocks better, more effective solutions.
Less developed countries often rely heavily on
Determining the effect of foreign assistance on
international foreign assistance to contribute
economic growth will provide less developed
large amounts to annual budgets (Friedmann,
countries more precise prescriptions for
Wolfgang, Kalmanoff, and Meagher 1966). In
development policy. Understanding and
general, these countries depend on foreign
evaluating the actual effect foreign assistance
assistance to supplement domestic sources of
has on economic growth will generate insight
revenue, which are often difficult to assess and
into which development policies promote
collect. Since foreign assistance originates
economic growth efficiently, thus providing less
outside the country from legitimate, reputable
developed countries with better suggestions for
sources, it represents a dependable source of
long-term development strategies.
revenue for less developed countries that can be
Literature Review.
exactly measured and allocated during the
Although a significant amount of
budget process. Furthermore, because
literature has investigated the effect of foreign
policymakers and other government officials in
assistance on economic growth in less developed
both donor and recipient states perceive foreign
countries, researchers remain divided in their
assistance as a primary catalyst for economic
conclusions regarding its effectiveness.
growth, officials tailor development programs
Economists and political scientists achieve
and projects around foreign assistance. The
varying results and subsequent conclusions
perception that foreign assistance is an essential
depending on a host of variables, including
ingredient to economic growth creates a climate
sample year, number of countries included in the
where questions of economic and development
sample, longevity of study, geographic regions
represented in the study, type of foreign
Furthermore, recipients must undertake
assistance measured, and methodology. Overall,
institutional reforms to ensure their success at
the research indicates a dichotomous split in
economic development. Specifically, tax
conclusions; one branch suggests foreign
collection, private savings, investment, and
assistance is an effective method of promoting
export promotion must be supported by foreign
long-term economic growth, while the other
assistance recipients. Donor countries must
maintains foreign assistance is ineffective and, at
broaden the type of assistance provided to
times, counterproductive.
supplement and complement the recipient’s
Chenery and Strout (1966) develop an
pattern of investment and production. Donors
intellectual framework from which to judge the
should also tie future assistance levels to the
effectiveness of foreign assistance at
recipients’ effectiveness at increasing their level
encouraging economic growth in less developed
of domestic savings and investment rates.
countries. Their work also provides broad
Papanek (1973) analyzes the effect of
prescriptions for both donor and recipient
foreign resources on growth and the relationship
countries to enhance the efficacy of foreign
between foreign resources and savings. Papanek
assistance inflows. Chenery and Strout argue
adopts a linear regression model to measure the
that domestic resource limitations and
effect of foreign assistance on economic growth
constraints act as the critical obstacle to
in less developed countries. Papanek constructs
economic growth in less developed countries.
his model regressing savings, foreign assistance,
The introduction of foreign assistance allows
foreign private investment, and other foreign
recipients to supplement and utilize their limited
inflows against annual rates of gross domestic
resources in the most productive manner.
product (GDP) growth. Papanek’s model
Chenery and Strout find that recipients of
indicates that foreign assistance possesses a
foreign assistance achieve average growth rates
statistically significant coefficient twice as great
higher than they would in the absence of such
as the other independent variables, indicating
inflows. The growth rate of less developed
foreign assistance does contribute to economic
countries would be approximately 3.4 percent,
growth. Papanek reasons that foreign
or less than 1 percent per capita, without the
assistance’s large contribution to economic
introduction of foreign assistance. Chenery and
growth occurs because it can fill the foreign
Strout’s conclusion provides a list of policy
exchange gap as well as the savings gap, which
prescriptions for donors and recipients to bolster
the other independent variables are unable to
the effectiveness of foreign assistance. For
accomplish. Papanek’s theory supports Chenery
recipients, Chenery and Strout prescribe
and Strout’s contention that foreign assistance
measures to increase output and increase skills.
encourages economic growth by supplementing
the gap between savings and investment.
regimes. After constructing a three-part regime
Papanek also discovers that foreign assistance
typology, he argues that various regime types
and domestic savings are inversely (negatively)
will utilize foreign assistance receipts in
related. Papanek concludes that foreign
different manners. An elitist government will
assistance has a more significant effect on
maximize the welfare of a fixed ruling coalition.
growth than savings or other forms of foreign
An Egalitarian government tries to maximize the
resource inflows in less developed countries.
welfare of those with low resource endowments.
Foreign assistance does contribute significantly
Finally, a laissez-faire government will
to economic growth, as measured by rate of
maximize the welfare of a minimum fraction of
change in GDP.
the population. Boon contends that regime type
Levy (1987) builds on Papanek’s
influences the goals of the government and its
research by examining what proportion of
channels of choosing and implementing policy.
foreign assistance is used to finance current
He suggests that all types of political regimes
consumption. Levy hypothesizes that assistance
allocate foreign assistance to the benefit of high-
transfers include heterogeneous components that
income political elites. Foreign assistance
maintain different marginal propensities to raise
programs do not alter the incentive structure of
consumption. Levy contends that less developed
governments to implement or deliver programs
countries treat foreign assistance the same as
and services to those in need.
domestic income; the marginal propensity to
Burnside and Dollar (1997) follow
consume and the marginal propensity to save for
Boone’s research by focusing on the institutional
both domestically generated revenue and foreign
quality of foreign assistance recipients.
assistance receipts are identical. Levy finds that
Burnside and Dollar contend that the
the marginal propensity to consume from
effectiveness of foreign assistance in facilitating
foreign assistance funds is .4. Levy concludes
economic growth will depend on the overall
that foreign assistance not intended for
institutional structure and policy environment of
emergency or disaster relief is not consumed but
the recipient. Countries with sound financial
invested by the recipient government. Levy also
institutions, a strong regulatory environment,
concludes that foreign assistance was effective
economic stability, and fiscal discipline will
at promoting economic growth during the 1970s.
utilize foreign assistance better than states
More recent empirical works has
lacking these qualities. Using panel regression
focused on the macroeconomic environment’s
for fifty-six less developed countries and six 4-
affect on foreign assistance’s utilization. Boone
year periods between 1970 and 1993, Burnside
(1996) hypothesizes that the effectiveness of
and Dollar conclude that foreign assistance does
foreign assistance is a function of political
have a positive effect on economic growth when
the necessary institutions and policy frameworks
statistically significant at the one percent level,
exist. Foreign assistance facilitates economic
implying that increases in foreign assistance
growth in an economic environment with good
would increase economic growth in less
fiscal, monetary, and trade policies. The World
developed countries.
Bank (1998) reaches similar conclusions. The
Griffin and Enos (1970) provide a
World Bank argues that foreign assistance can
contrasting view of foreign assistance and its
stimulate economic growth and development
contribution to economic growth in less
when the recipient creates the proper economic
developed countries. Griffin and Enos seek to
environment through stable fiscal, monetary, and
determine which countries lend foreign
trade policies. Hence, the effectiveness of
assistance, the motives for providing assistance,
foreign assistance in facilitating economic
and the consequences for the recipients. First,
growth in less developed countries depends on
Griffin and Enos contend that foreign assistance
the fiscal and economic environment of the
is a tool powerful countries wield against the
recipient.
less powerful to promote ideology and control in
Fayissa and El-Kaissy (1999) develop
the world arena. Foreign assistance is an
an explanatory model for economic growth in
instrument of foreign policy that safeguards
less developed countries that attempts to explain
relationships and perpetuates the status quo.
why some countries utilize foreign assistance
Second, Griffin and Enos argue that foreign
better than others. The major contribution of
assistance is not correlated with economic
their work is the incorporation of political and
growth. Using a linear regression model of the
human capital variables in their model of
amount of foreign assistance received and the
economic growth. Fayissa and El-Kaissy
rate of GNP growth for fifteen African and
include an index of political and civil liberties,
Asian countries between 1962 and 1964, Griffin
as well as a measure of investment in human
and Enos conclude that there is no relationship
capital to determine if foreign assistance
between amount of aid received and economic
contributes to economic growth in less
growth as measured by GNP. Griffin and Enos
developed countries. Using a data from eighty
conclude that foreign assistance undermines
less developed countries between 1971 and
economic development in several ways. First,
1990, their results confirm that foreign
foreign assistance lowers domestic savings.
assistance positively affects economic growth in
Second, foreign assistance distorts investment
less developed countries for the observed time
composition, which raises the capital-output
period. Their research concludes the
ratio. Third, foreign assistance hinders the
relationship between foreign assistance and
development and emergence of an indigenous
growth of real gross domestic product is
entrepreneurial class. Finally, foreign assistance
prevents institutional reforms that are
and controls for the effects of per capita income.
prerequisites for economic growth.
Snyder’s model relates domestic savings as a
In subsequent research Bowles (1987)
function of per capita income and foreign
tests Griffin and Enos’ conclusion that foreign
assistance, where foreign assistance is
assistance undermines economic growth in less
determined by need. Snyder employs a panel
developed countries by retarding domestic
data set covering fifty low- and middle-income
savings rates while subsequently increasing
countries across the 1960s, 1970s, and 1980s.
aggregate consumption. Bowles concludes that
Snyder concludes that Griffin and Enos’
a statistically significant relationship between
argument that aid-switching occurs in less
foreign assistance and domestic savings rates
developed countries is unfounded; foreign
does not exist in nine of the twenty countries
assistance has little influence on domestic
examined. Furthermore, in ten of the twenty
savings.
countries studied, no causal relationship could
Mosley, Hudson, and Horrell (1987)
be established between foreign assistance and
study the effectiveness of foreign assistance
domestic savings. Given the results, Bowles
across countries to determine why foreign
argues that generalizations concerning causal
assistance stimulates economic growth in some
relationships and mechanisms between foreign
regions while not others. Mosley, Hudson, and
assistance and domestic savings rates must be
Horrell criticize previous studies for employing
treated with caution. Bowles maintains that the
linear regression models to explain the effect of
complex social, economic, political, and social
foreign assistance on economic development.
structures of less developed countries prevent
They contend foreign assistance does not
one unified theory of how foreign assistance
operate in a straightforward manner, as implied
affects economic growth.
by regression techniques, but operates instead
Snyder (1990) further critiques Griffin
through three subtle, indirect channels. Mosley,
and Enos’ research. Following Papanek (1973),
Hudson, and Horrell create a sophisticated
Snyder first notes that numerous factors, such as
model where governments attempt to maximize
per capita income, wars, terms-of-trade changes,
their own welfare in the face of budgetary
natural disasters, and political disturbances can
constraints, with foreign assistance facilitating
significantly affect the distribution and use of
the removal or diminishment of budget
foreign assistance. The existence of these
constraints. Mosley, Hudson, and Horrell argue
variables can create a spurious relationship
that foreign assistance inflows allow
between foreign assistance need and foreign
governments to finance re-occurring
assistance receipts. Snyder analyzes the effect
expenditures that would not be possible without
of foreign assistance on domestic savings rates
foreign assistance. Mosley, Hudson, and
Horrell’s budgetary constraints model of foreign
re-occurring project expenditures that cannot be
assistance corresponds with the theory outlined
supported without foreign assistance. Dacy
by Griffin and Enos. Mosley, Hudson, and
concludes that the marginal propensity to save
Horrell conclude that aid in the aggregate had no
and government consumption patterns are the
demonstrable effect on economic growth in
critical factors affecting foreign assistance’s
recipient countries during the 1970s or 1980s. It
long-term effectiveness. Higher levels of the
is impossible to establish any statistically
marginal propensity to save will likely stimulate
significant correlation between aid and the
economic growth once foreign assistance is
growth rate of GNP in less developed countries.
withdrawn. Lower levels of government
Dacy (1975) demonstrates that under
consumption during periods of foreign
certain conditions less developed countries may
assistance increase the likelihood that foreign
experience lower growth rates after termination
assistance will be effective in promoting
of foreign assistance than they would have had
economic growth in the long-run.
foreign assistance not been introduced. The
Khan and Hoshino (1992) study the
post-aid growth rate for an aid recipient may be
impact of foreign assistance on the behavior of
lower than it would have been in a non-aid
recipient governments in South and Southeast
environment. Dacy argues that foreign
Asia. They hypothesize that the expenditure and
assistance is a substitute for domestic savings.
revenue efforts of recipient governments are
Recipient countries increase both consumption
affected by foreign assistance through
and investment with the receipt of foreign
categorical budgetary reallocations. Khan and
assistance, resulting in an overall decrease in
Hoshino sample five South and Southeast Asian
domestic savings, causing lower levels of
countries and create a regression model with
economic growth once donors withdraw foreign
pooled time-series, cross-sectional data. They
assistance. Dacy contends that the introduction
conclude that foreign assistance is distributed
of foreign assistance facilitates government
between consumption and investment in less
consumption of expensive re-occurring
developed countries. Khan and Hoshino also
expenditures that require sustained foreign
find that foreign assistance may divert resources
assistance. Foreign assistance allows recipient
from investment to consumption under certain
governments to increase consumption without
conditions. Governments treat foreign
undertaking difficult institutional and fiscal
assistance as an increase in income which,
changes that would otherwise be necessary to
combined with a positive income elasticity,
support greater consumption. Foreign assistance
allows an increase in consumption to occur. The
erodes the incentive for prudent government
marginal propensity to consume from foreign
expenditures, so governments undertake costly
assistance inflows is less than one, indicating
that some investment does occur with the
time and then deduced broad conclusions for
introduction of foreign assistance. Finally, Khan
entire regions, this research examines a broad
and Hoshino discover that foreign assistance in
section of less developed countries across
the form of loans achieves higher rates of
multiple regions. Adopting this approach
investment than does grants. Ceteris paribus,
permits cross-regional comparisons and allows
governments invest eighty-five cents of every
hypotheses to emerge to account for regional
loan dollar, whereas only thirty-two cents of
differences in foreign assistance-led economic
grant inflows are invested by less developed
growth.
countries.
Hypothesis and Theory.
I hypothesize that foreign assistance
This research will contribute and
supplement the current literature on foreign
positively affects economic growth in less
assistance’s contribution to economic growth in
developed countries. Countries that receive high
less developed countries in three ways. First,
levels of foreign assistance should experience
this study incorporates more recent data, thereby
greater levels of economic growth, ceteris
supplanting the older data of previous studies.
paribus, than countries that receive little or no
Second, this study employs a large scope and
inflows of foreign assistance. A positive
breadth of statistical observations to determine
relationship should exist between receiving
the effect of foreign assistance on economic
foreign assistance and achieving economic
growth in less developed countries. Unlike
growth.
previous studies that analyze a small sample of
Aside from foreign assistance, I control
less developed countries for a relatively brief
for six other independent variables that influence
time period, this research examines eighty-two
economic growth in less developed countries.
countries for the seventeen year period 1976 to
The focus of this research is how the level of
1992. More numerous observations of time-
foreign assistance affects economic growth in
series data allow greater confidence in the
less developed countries holding other political
results, statistical models, and conclusions
and economic variables constant. As such, I will
drawn by the research. Finally, this study will
briefly describe the six other independent
contribute to the empirical literature by
variables’ hypothesized effect and then provide
introducing a cross-regional approach to the
a detailed account of how foreign assistance
examination of foreign assistance’s effect on
specifically influences economic growth.
economic growth in less developed countries.
Domestic savings, domestic consumption,
Whereas previous research only focused on
imports, exports, level of democracy, and infant
select, isolated examinations of a relatively
mortality rate significantly affect economic
small number of countries for a short period of
growth. Economic theory indicates that
domestic savings should be positively related to
democratic countries better protect property
the level of economic growth. Higher levels of
rights, contracts, and economic transactions,
domestic savings provide the necessary capital
thereby creating the proper incentive structure
to develop a country’s infrastructure and expand
for firms and individuals to develop
output. Consumption should also be positively
infrastructure and invest in long-term, value-
related to economic growth. Economic growth
added projects. Economic growth is negatively
requires consumption to occur; when
related to infant mortality; as infant mortality
consumption levels for government, firms, and
rates increase, economic growth decreases.
individuals are high, the economy may expand
Boone (1996) and Boone and Faguet (1998)
through the Keynesian money multiplier effect.
argue that infant mortality rate acts as a proxy
Higher levels of aggregate consumption increase
variable for overall human capital and general
demand for goods and services, facilitating
population health. A high infant mortality rate
economic growth. The effects of the import and
suggests that a country does not possess the
export variables can best be understood by
necessary resources or infrastructure to
analyzing them together as a country’s net
adequately deliver basic nutrition and healthcare
export position. Net exports’ affect on
to its citizens. An unhealthy, undercapitalized
economic growth will depend on whether the
society cannot fully appreciate its productive
country exhibits a positive or negative balance
potential.
of trade. A positive net export position enhances
Foreign assistance facilitates long-term
a country’s economic growth by improving its
economic growth in less developed countries in
balance of payments. Positive net exports
two ways. First, foreign assistance introduces a
indicate more resources are flowing into a
stream of resources that would fail to exist
country than are exiting, which facilitates
otherwise, thereby stimulating economic growth.
economic growth. Conversely, countries with
Foreign assistance inserts previously unavailable
negative net export positions suffer from balance
resources into the less developed country’s
of payment problems, which hinder economic
economy, which provides the necessary impetus
growth. An increasing level of democracy
to inaugurate economic growth and
should positively affect economic growth in less
development. Initially, foreign assistance
developed countries. According to Boone
loosens domestic economic constraints facing
(1996), Dollar and Burnside (1997), Boone and
governments of less developed countries.
Faguet (1998), and Riddell (1987), as countries
Foreign assistance supplants domestic revenue,
become more democratic, they develop the
thereby relaxing budget constraints. Relaxed
legal, political, and economic frameworks to
budget constraints allow government
facilitate economic growth. Specifically, more
consumption to increase. Government
consumption stimulated by foreign assistance
projects, including large infrastructure programs
causes an aggregate increase in demand for
such as dams, hydroelectric plants, electrical
numerous goods and services, thereby creating
grids, communications systems, railroads, ports,
the foundation for broad-based economic
and highways. The construction of major
development. The increase in demand caused
infrastructure projects encourages the
by greater government consumption ripples
development of broader markets and national
throughout the economy, subsequently
linkages. As communities become effectively
stimulating supply and demand reactions in
connected to one another through highways,
firms and individuals. Increased government
railroads, ports, and communications lines, a
demand for products and services encourages
greater dependency develops between
firms to increase production, generating
communities for trade and the exchange of
additional revenue for those firms. The labor
goods, services, and information. Through
force increases in response to growing public
national linkages, communities that were once
and private sectors. As the labor force grows
isolated and self-dependent achieve the ability to
and finite labor resources diminish, wages begin
specialize and gain from regional comparative
to rise. Additionally, a larger participating labor
advantages.
force means an equally greater consumer
The national linkages created through
market, so consumer spending also increases.
infrastructure development encourage economic
More consumer spending and savings further
growth by broadening and deepening national
stimulates economic growth, creating its own
markets. First, infrastructure development and
rippling effect on the economy. Thus, foreign
subsequent national linkages allow firms access
assistance encourages economic growth in less
to mass consumer markets. Firms gain the
developed countries in a circular pattern by
ability to reach more consumers and take
allowing consumption to expand, which causes
advantage of economies of scale. Second, a
an aggregate rise in demand and supply of goods
system of national linkages and access to vast
and services, thereby broadening labor markets
consumer markets acts as a catalyst to accelerate
and increasing wages, leading to greater savings
the growth of indigenous firms. Firms have an
and consumption patters.
incentive to develop because of greater demand
Second, foreign assistance stimulates
from mass consumer markets. Potential
economic growth in less developed countries by
entrepreneurs perceive consumer markets as
encouraging infrastructure development and the
untapped revenue sources that entice them to
creation and entrenchment of national linkages.
incorporate. Third, the introduction of more
As Levy’s research indicates, governments
firms throughout the country implies a greater
invest foreign assistance into development
quantity and variety of products. A richer
diversity of firms distributed throughout a
received, domestic consumption, domestic
country creates the opportunity for more
savings, domestic investment, net exports, level
products to be developed. The combination of a
of democracy, and infant mortality rate all vary
greater number of firms and more products
across time and across countries in the sample.
contending for consumer loyalty and spending
Given that the independent variables do change
generates competition. Competition, in turn,
on an annual basis, it logically follows that the
eventually translates into lower prices for
dependent variable, level of economic growth,
consumer and higher product quality.
also changes on an annual basis because of
Ultimately, once national linkages and the
changes in the independent variables. For the
subsequent markets have developed, the country
level of economic growth to change, the
will begin to attract outside investment. As the
economic and social variables on the dependent
economy grows and markets strengthen, the
side of the equation must first change.
country will become more attractive for
Economic growth only occurs when there is a
investors, who will infuse capital into the
change in the independent variables.
country. The infusion of foreign capital will
Additionally, my hypothesis exhibits co-
encourage its own wave of economic growth
variation. Given that the dependent variable,
throughout the country. Thus, foreign assistance
economic growth, depends on changes in the
can encourage economic growth in less
independent variables, it follows that as the
developed countries by acting as the catalyst that
independent variables change, so to will the
develops the essential prerequisites of economic
dependent variable. If the economy expands and
development. Foreign assistance allows
the independent variables increase substantially,
governments to undertake initially large capital
the dependent variable should capture the
investments that are crucial in developing
economic expansion and report tremendous
infrastructure and national linkages. Once
annual economic growth. Finally, my
infrastructure and national linkages are in place,
hypothesis represents a non-spurious
markets may develop and create self-sustaining
relationship. I include regional dummy
economic growth.
variables to control for geopolitical differences
My hypothesis meets the three criteria
in the receipt of foreign assistance. The regional
necessary to establish causality. First, my
dummy variables control for the possibility that
hypothesis demonstrates time order; changes in
foreign assistance’s true affect depends on
the independent variables precede changes in the
belonging to a particular geographic region. I
dependent variable. The values of the
also report the independent variables as a
independent variables change on an annual
percent of gross domestic product to control for
basis. The amount of foreign assistance
economy size and country size, two factors that
could influence foreign assistance’s affect on
of foreign assistance receipts by not accounting
economic growth.
for a recipients’ contributions to international
Data and Method.
foreign assistance efforts. I employ the Polity
I employ three sources of data to
III database of democracy to measure the level
determine the effect of foreign assistance on
of democracy on an annual basis for each
economic growth in less developed countries. I
country in this study. Polity III ranks countries
collect data from all sources for the years 1975
on a democracy scale of 0 to 10, with 0
to 1992. Data for the dependent variable,
indicating a lack of democracy and 10 indicating
economic growth as measured by the annual
complete democracy. The database also uses –
percent change in gross domestic product, comes
77 and –88 to indicate periods of revolution or
from World Tables 1994 (1994) published by
regime change. Appendix I lists the less
the World Bank. The same edition of World
developed countries employed in regression
Tables 1994 also serves as the data source for
analysis by region as delineated by World
the independent variables public consumption,
Tables 1994 (1994).
domestic savings, imports, and exports. Public
Papanek (1973) develops a linear
consumption and domestic savings are each
regression model to determine the effect of
measured as a percent of annual gross domestic
foreign assistance on economic growth in less
product. Imports and exports are both measured
developed countries. Chenery and Strout (1966),
in millions of current United States dollars. I
Mosley, Hudson, and Horrell (1987), and Khan
calculate annual imports as a percent of gross
and Hoshino (1992) adopt similar permutations
domestic product by dividing the value of
of the model to determine the effect of foreign
imports by the value of gross domestic product
assistance receipts on economic growth.
and then multiplying the quotient by one
Papanek’s model holds that economic growth is
hundred. I use the same procedure to calculate
a function of gross domestic savings, foreign
annual exports as a percent of gross domestic
assistance, foreign private investment, and other
product for each year in the study. Data for net
foreign inflows. Papanek’s model understands
annual foreign assistance receipts comes from
economic growth to be the annual rate of
the 2000 Organization for Economic
increase in gross domestic product (GDP).
Cooperation and Development (OECD) database
Papanek expresses each independent variable as
available on the Internet. I use net annual
a percentage of GDP to hold the unit of analysis
foreign assistance receipts because it measures
constant in the model. Papanek’s model takes
the real amount of assistance a country receives
the form:
in a particular year. Using gross foreign
assistance would overestimate the actual amount
% ∆ GDP = c + β1(s / GDP) + β2(a / GDP) +
β3(i / GDP) + β4 (f / GDP)
where c is a constant, s represents gross
differences of the less developed countries under
domestic savings, a signifies total amount of
investigation. The dummy variables control for
foreign assistance, i is foreign private
regional biases in the data, including number of
investment, and f represents other foreign
countries represented in each region and
inflows. Papanek justifies this model of
differences in foreign assistance received by
economic growth by contending that the
each region. I exclude foreign investment as an
multiple components of investment provide the
independent variable because it exhibits a high
largest impetus to economic growth.
degree of multicollinearity with the domestic
Furthermore, Papanek argues that the primary
savings variable.
focus on the effect of foreign assistance on
My model builds on and enhances
economic growth permits his model. Among
previous models in several important ways.
others, Chenery and Strout (1966) and Dacy
First, this model incorporates two important
(1975) also acknowledge the importance of
independent variables, imports and exports, that
including both savings and investment in a
Papanek (1973) and others contend significantly
model of economic growth when investigating
affects economic growth in less developed
the effects of foreign assistance inflows.
countries. Second, Khan and Hoshino (1992)
I employ linear regression analysis
stress the importance of consumption in
similar to Papanek’s to create a formal
determining economic growth in less developed
mathematical model of foreign assistance’s
countries. They contend that consumption
affect on economic growth in less developed
contributes to economic growth, so it must be
countries. I contend that economic growth is a
included and controlled for when determining
function of foreign assistance, domestic savings,
the effect of foreign assistance on economic
domestic consumption, imports, exports, level of
growth. The model also controls for regional
democracy, and regional dummy variables.
differences through the dummy variables, a
Specifically, the percent change in annual gross
component not utilized by previous research.
domestic product is a function of foreign
Finally, my model incorporates a measure of
assistance as a percent of GDP, domestic
regime type which Przeworski and Limongi
savings as a percent of GDP, domestic
(1993), Haan and Siermann (1995), and
consumption as a percent of GDP, imports as a
Gasiorowski (2000) contend significantly affects
percent of GDP, exports as a percent of GDP,
the level of economic growth in less developed
level of democracy, and regional dummy
countries. Their research collectively indicates
variables. Expressing each independent variable
that regime type must be controlled when
as a percent of gross domestic product controls
analyzing economic growth because of the
for the geographical and population size
special structural, legal, and economic
average democracy scores for years when the
institutions inherent to democratized states.
democracy score is -77 or -88. For every year t
The dependent variable, annual percent
and every country c where the democracy score
change in gross domestic product, is calculated
equals -77 or -88, I average the democracy
by subtracting the gross domestic product of
scores of t-1 and t+1 to create a new non-outlier
year t-1 from the gross domestic product of year
democracy score for year t. If multiple years t1
t and then dividing the difference by the gross
… tk contain –77 or –88 for a particular country,
domestic product of year t-1. The quotient is
I replace the multiple t1 … tk years with the
then multiplied by one hundred to yield the
average of t1-1 and tk+1 for the years
percent change in gross domestic product
immediately preceeding and following the
between year t and t-1. The dummy variables
transition period of years t1 … tk.
I complete two unique types of
control for regional differences inherent to the
data. Each region as specified by the World
regression models for years 1976 to 1992 to
Bank’s World Tables 1994 is assigned a specific
estimate the effect of foreign assistance on
number for differentiation. Dummy variable 1
economic growth in less developed countries.
(d1) represents Sub-Saharan Africa, dummy
The first regression series employs ordinary
variable 2 (d2) delineates South Asia, dummy
least squares (OLS) regression analysis to
variable 3 (d3) represents East Asia, dummy
determine the coefficients and statistical
variable 4 (d4) signifies Latin America and the
significance of the model:
Caribbean, and dummy variable 5 (d5) identifies
Yt = β0 + β1(St) + β2(Ct) + 3(Xt)
the North Africa and the Middle East. The
+ β4(Mt) + β5(Ot)
constant of the regression model indicates the
+ β6(At) + β7(D1)
final region, Eastern Europe and Central Asia.
+ β8(D2) + β9(D3)
Each dummy variable is coded so one indicates
+ β10(D4) + β11(D5) + et
a country belonging to that particular region,
while zero signifies all other countries.
The democracy rank for several
countries contains successive -77 or -88
rankings. These few -77 and -88 scores become
outlier cases when plotted against annual
economic growth. Including multiple outlier
cases skews ordinary least squares regression
analysis by substantially altering the sample
mean. I correct the outlier cases by creating
Where:
Y equals percent change in gross domestic
product between years t and t-1;
S equals savings as a percent of gross domestic
product in year t;
C equals consumption as a percent of gross
domestic product in year t;
X equals exports as a percent of gross domestic
product in year t;
M equals imports as a percent of gross domestic
product in year t;
analysis should be used. The second model I
specify employs WLS analysis to each annual
O equals level of democracy in year t;
regression model to correct for the
A equals foreign assistance as a percent of gross
heteroskedastic error of the cross-sectional data.
domestic product in year t;
D1 … D5 indicate the regional dummy variables
as previously specified; and
et represents the error term.
The null hypothesis for this model is:
Weighted least squares transforms
heteroskedastic data into homoskedastic data
that conforms to the assumption that the error
term is homoskedastic with equal variance for
all levels of x. Each parameter of the equation is
H0: β6 = 0, which indicates that foreign
divided by the square root of At to weight the
assistance has no affect on economic growth.
data. The transformed model is:
⎞
⎛
⎞
⎛
⎞
⎛
⎞
⎛
⎛ 1 ⎞
⎞
⎛
⎞
⎛
⎟ + β ⎜ St ⎟ + β ⎜ Ct ⎟ + β ⎜ X t ⎟ + β ⎜ M t ⎟ + β ⎜ Ot ⎟ + β ⎜ At ⎟
= β0 ⎜
1
2
3
4
5
6
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
At
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
yt
⎛ D ⎞
⎛ D ⎞
⎛ D ⎞
⎛ D ⎞
⎛ D ⎞
+ β 7 ⎜ 1 ⎟ + β 8 ⎜ 2 ⎟ + β 9 ⎜ 3 ⎟ + β10 ⎜ 4 ⎟ + β11 ⎜ 5 ⎟
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
⎜ A ⎟
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
⎝ t ⎠
The alternative hypothesis for this model is:
where the coefficients and variable symbols
H1: β6 > 0, which indicates that foreign
conform to the specifications of the original
assistance has a positive affect on economic
model. I transform the original variables into
growth.
weighted variables for all years in this study.
Hill, Griffiths, and Judge (1997) indicate
The weight for WLS regression model is foreign
that cross-sectional data generally exhibits
assistance as a percent of gross domestic product
heteroskedasticity, a violation of the
for year t when the dependent variable is
homoskedasticity assumption of ordinary least
economic growth between t and t-1. The
squares analysis. Heteroskedasticity must be
weighted least squares model is computed by
controlled for two reasons. First, linear
SPSS when the foreign assistance variable is
regression models with heteroskedasticity no
selected as the WLS weight in the regression
longer generate the best linear unbiased
model specification menu.
estimators. Second, the standard errors
I create seventeen models to
computed for least squares estimators with
demonstrate the effect of foreign assistance on
heteroskedasticity are incorrect (Hill, Griffiths,
economic growth in less developed countries for
and Judge 1997). To correct for heteroskedastic
both ordinary least squares regression and
error, weighted least squares (WLS) regression
weighted least squares regression. I apply the
model to a pool of eighty-two countries on an
assistance has a statistically significant affect on
annual basis for the period 1976 to 1992. For
economic during 1977, 1978, 1981, 1986, and
each year of the test period a model is
1992. The 1977 and 1978 coefficients are
constructed to determine the β6 coefficient and
statistically significant at the 10% level. The
its statistical significance. Appendix II details
1986 coefficient is statistically significant at the
results from OLS regression analysis, and
5% level, while the 1981 and 1992 coefficients
Appendix III details the WLS results.
are statistically significant at the 1% level.
Results.
Examining only the statistically significant
Overall, both the OLS and WLS
foreign assistance coefficients generated by OLS
regression models indicate that foreign
techniques indicate that, overall, foreign
assistance does affect economic growth in less
assistance negatively affects economic growth in
developed countries. However, the analysis
less developed countries. The OLS estimates
does not fully support my hypothesis that
suggest that countries that receive higher levels
foreign assistance positively influences
of foreign assistance will exhibit lower levels of
economic growth in less developed counties.
economic growth than non-assistance recipients.
The OLS regression indicates that foreign
In 1977, for every one percent increase in
assistance positively contributed to economic
foreign assistance as a percent of gross domestic
growth in 1976, 1982, 1984, 1985, 1987, 1988,
product, economic growth decreased by .509
and 1989, while the other years of this study
percentage points holding all other independent
maintained negative coefficients. WLS
variables constant. Similarly, a one percent
regression analysis shows that foreign assistance
increase in foreign assistance as a percent of
positively influenced economic growth in 1976,
gross domestic product reduced economic
1981, 1982, 1983, 1984, 1985, 1987, 1988,
growth by .413 percentage points in 1978, .815
1989, and 1990. The remainder of the years in
percentage points in 1986, and .485 percentage
this study possess negative coefficients. Table
points in 1992. In 1981, for every one percent
1.1 details the annual foreign assistance
increase in foreign assistance as a percent of
coefficient (β6), t-value, and p-value generated
gross domestic product, economic growth
by both OLS and WLS regression techniques
increased by .836 percentage points.
holding all other independent variables constant.
The coefficients in Table 1.1 indicate
The WLS estimates of foreign
assistance’s affect on economic growth in less
that foreign assistance does have a statistically
developed countries provide a slightly more
significant affect on economic growth in less
optimistic prediction. WLS regression generates
developed countries for several of the years of
statistically significant foreign assistance
this study. Using OLS regression, foreign
coefficients for years 1976, 1977, 1978, 1980,
Table 1.1: Annual Foreign Assistance Coefficient
Year
B6: OLS
t-score
p<
B6: WLS
t-score
p<
1976
0.461
1.634
0.108
0.677
3.431
0.001
1977
-0.509
-1.739
0.087
-0.460
-2.276
0.027
1978
-0.413
-1.703
0.094
-0.515
-0.259
0.012
1979
-0.016
-0.390
0.698
-0.0003
-0.023
0.981
1980
-0.546
-1.160
0.251
-0.609
-2.561
0.013
1981
0.836
3.623
0.001
1.199
7.073
0.000
1982
0.123
0.444
0.660
0.089
0.645
0.523
1983
-0.060
-0.241
0.810
0.097
0.797
0.429
1984
0.169
0.738
0.463
0.123
0.781
0.438
1985
0.302
1.099
0.276
0.340
1.802
0.077
1986
-0.815
-2.086
0.041
-1.259
-4.482
0.000
1987
0.002
0.067
0.947
0.008
0.473
0.638
1988
0.130
0.378
0.707
0.197
0.851
0.398
1989
0.027
1.545
0.128
0.021
5.800
0.000
1990
-0.102
-0.057
0.955
0.216
0.668
0.507
1991
-0.010
-0.180
0.858
-0.008
0.457
0.650
1992
-0.485
-3.108
0.003
-0.565
-4.044
0.000
1981, 1985, 1986, 1989, and 1992. The 1985
increased economic growth by 1.199 percentage
coefficient is statistically significant at the 10%
points in 1981, .34 percentage points in 1985,
level. The 1977 coefficient is statistically
and .021 percentage points in 1989. However,
significant at the 5% level. The 1976, 1978,
in 1977, for every one percent increase in
1980, 1981, 1986, 1989, and 1992 coefficients
foreign assistance as a percent of gross domestic
are statistically significant at the 1% level. The
product, economic growth declined by .46
WLS estimates are fairly evenly split in their
percentage points. Likewise, for every one
predicted effects. The 1976, 1981, 1985, and
percent increase in foreign assistance as a
1989 coefficients indicate that foreign assistance
percent of gross domestic product, economic
positively contributes to economic growth in
growth declined by .515 percentage points in
less developed countries. In 1976, for every one
1978, .609 percentage points in 1980, 1.259
percent increase in foreign assistance as a
percentage points in 1986, and .565 percentage
percent of gross domestic product, economic
points in 1992.
growth increased .677 percentage points.
Conclusions.
Similarly, a one percent increase in foreign
assistance as a percent of gross domestic product
This study examined the effect of
foreign assistance on economic growth in less
developed countries. The purpose of the
The existence of both negative and
research was to determine whether foreign
positive foreign assistance coefficients may be
assistance was a statistically significant
partially explained by global economic shocks
contributor to economic growth in less
and business cycles. Sign changes for the
developed countries. I hypothesized that foreign
foreign assistance coefficient roughly
assistance would significantly contribute to
correspond with major world economic events.
economic growth. Based on the statistically
The negative OLS and WLS coefficients for the
significant estimates of the foreign assistance
period 1977 to 1980 could be attributed to the
coefficient, β6, generated by both ordinary least
1970s oil crisis and subsequent economic
squares and weighted least squares regression
slowdown. Higher oil prices, coupled with a
techniques, I am unable to fully accept my
decreased import demand in developed
hypothesis. Foreign assistance positively
economies, could disrupt domestic fiscal and
contributes to economic growth in some years,
monetary stability in less developed countries,
while at other times it significantly decreases
undermining the effectiveness of foreign
economic growth in less developed countries.
assistance. Similarly, a lag effect from the
According to the ordinary least squares model,
United States’ 1982 recession could explain the
foreign assistance enhanced economic growth in
negative OLS coefficient in 1983. The mostly
1981, while it reduced economic growth in
positive coefficients between 1984 and 1989
1977, 1978, 1986, and 1992. The weighted least
could be explained by the general improvement
squares model indicates that foreign assistance
in the overall global economy and the ripple
facilitated economic growth in 1976, 1981,
effect generated by the United States’ substantial
1985, and 1989. This model further
economic expansion. A strong, robust
demonstrates that foreign assistance diminished
macroeconomic environment could improve the
economic growth during 1977, 1978, 1980,
terms of trade for developing countries, which
1986, and 1992. Collectively, these results
would provide the fiscal and economic stability
suggest that no firm, universal conclusion may
necessary for foreign assistance to be harnessed
be drawn on the effectiveness of foreign
effectively. Finally, the negative coefficients for
assistance. The annual foreign assistance
1990, 1991, and 1992 could be explained by
coefficient signs do not follow any definite
recession in the United States and the breakup of
pattern or trend, making it difficult to
the Soviet Union. The Soviet Union’s
extrapolate firm predictions from the models.
dissolution disrupted trade relationships,
This problem could be addressed in future
severely altered aggregate supply and demand,
research by employing pooled time-series cross-
and initiated a period of severe economic
sectional regression techniques.
hardship for its former members and trading
partners. Furthermore, following Burnside and
governments of these countries react to foreign
Dollar (1997) and the World Bank (1998), the
assistance inflows. First, more research must be
Soviet Union’s collapse introduced political
completed to determine why some regions
instability and created a poor fiscal and
perform better with foreign assistance inflows
monetary environment, thereby undermining the
than do others. Research should commence to
effectiveness of foreign assistance. The severe
determine why some regions are better able to
political and economic disruption initiated by
utilize foreign assistance and channel it to
the Soviet Union’s demise introduced
achieve significant rates of economic growth.
tremendous political and economic shocks that
Why are some regions better able to utilize
disrupted foreign assistance’s delivery channels,
foreign assistance than others? Tentatively,
thereby hindering its effectiveness.
population, level of poverty, unemployment rate,
The estimates of foreign assistance’s
literacy rate, and industrial composition of a
effectiveness may be used by policymakers in
region should affect how foreign assistance is
donor and recipient countries to devise new,
utilized and help determine the success of
more efficient development strategies. My
foreign assistance inflows in contributing to
results indicate that foreign assistance does not
economic growth. Future research should focus
necessarily foster or impede economic growth.
on the regional level of analysis and attempt to
This study suggests that foreign assistance can
explain why some regions perform better than
play a significant role in economic growth, but it
others when granted foreign assistance.
does not guarantee success. Using this
Second, additional research should be
conclusion as a foundation, donors and
completed to determine the influence foreign
recipients may focus their attention on creating
assistance exerts on the fiscal behavior of
the necessary political and economic
governments in less developed countries.
environment that increases the probability for
Research needs to be initiated to determine how
foreign assistance to catalyze economic growth.
the receipt of foreign assistance influence fiscal
Understanding that foreign assistance may
and monetary policy in less developed countries.
generate economic growth creates an incentive
As other researchers have noted, foreign
for donors and recipients to undertake
assistance inflows may allow governments of
institutional, economic, and political reforms to
less developed countries to undertake programs
harness foreign assistance’s full development
and policies that would otherwise be
potential
unobtainable. The results of these foreign
More research needs to be undertaken to
assistance-led programs and policies may not be
examine how foreign assistance behaves in the
sustainable in the long-term without the
economies of less developed countries and how
perpetuation of foreign assistance inflows.
Research must be initiated to better understand
how governments change their fiscal and
monetary policies in response to foreign
assistance inflows. Better policy prescriptions
and foreign assistance packages may be
developed once the international development
community knows and understands how foreign
assistance affects long-term fiscal and monetary
behavior of foreign assistance recipients.
Third, subsequent research needs to
deconstruct foreign assistance data, fracturing in
into its multiple components. For each country,
the total foreign assistance receipts should be
initially divided into two categories: foreign
assistance from multilateral sources and foreign
assistance from bilateral donors. Receipts in
each category should be further separated into
they method of foreign assistance transmission:
loaned funds in the form of cash, donations in
the form of cash, technical assistance, donations
in the form of food products, donations in the
form of physical capital, and donations in the
form of medical equipment. Such an extensive
partition of foreign assistance receipts will
facilitate the creation of models that better
conceptualize the multiple forms of foreign
assistance, allowing researchers to determine
what type of foreign assistance contributes the
most to economic growth in less developed
countries. That knowledge, in turn, will provide
better prescriptions to policymakers, donor
agencies, and foreign assistance recipients who
seek to gain the greatest impact from each
foreign assistance dollar.