On aid, growth and good policies

This study provides a critical analysis of the growth regressions in Burnsi de and Dollar [2000]. First, we analyse the relationship between aid and go vernment expenditure in a modified neo-classical growth model. One of the m ain results of the analysis is that while good policies spur growth, they m ay at the same time reduce the effectiveness of foreign aid. Second, we sho w that the econometric results in Burnside and Dollar emphasising the cruci al role of interaction between aid and good policies in the growth process are fragile, as they are extremely data dependent. Finally, we demonstrate that the Burnside and Dollar data lend support to the idea that the associa tion between aid and growth can be approximated by decreasing returns to ai d. This finding conforms well to regression results in other recent studies .