Does Foreign Aid Equal Welfare?

Abstract: For decades, foreign aid has been a way to uphold political relationships, promote growth and development as well as a response during emergencies. Research on the relationship between foreign aid and economic growth has been done extensively. However, research on aspects beyond economic ones is far more limited. To extend the discussion regarding foreign aid, this thesis examines foreign aid and its relationship with the Human Development Index to capture more aspects of development than sole economic ones. As previous research has given ambiguous results on the effects of foreign aid on human development, we disaggregate the aid term to see how the effects vary depending on which sector it is allocated to. Specifically, this thesis examines how the three largest foreign aid sectors affect HDI. These sectors are: social infrastructure, economic infrastructure and production. Through a panel data study spanning 21 years and 84 countries, the objective is to better understand where aid should be allocated to reach the best results on overall welfare. Our results display a significant relationship between the social infrastructure sector and HDI which is our most important finding. Further, no significant effect is found from aid in economic infrastructure, or in the production sector on HDI.