Does Aid Work? A Cross-country Aid Efficiency Study

Abstract: Foreign aid and all kinds of support aiming at international development are of great importance for the developing nations. The World Bank's report "Assessing aid" claims that aid is efficient conditional on institutional quality and good policy. There have been a lot of criticism and debate around this conclusion. E.g. Dalgaard, Hansen and Tarp who claim that this conclusion is doubtful since the construction of the policy index is questionable. In addition they argue that aid is less efficient in countries with tropical climate. With this as background, the author has constructed two policy indexes with alternative measures on trade and monetary policy and run these in a growth regression together with a measure of institutional quality and a tropical dummy in order to see whether aid works and if the choice of variables in and construction of the policy index might influence the outcome of the growth regression. The results were indeed very dependent on which combination of variables that were included in ther regression therefore no straight answer whether aid spurs growth in developing nations can be decided.