The Effect of Foreign Aid and Governance on Economic Growth

Abstract

Foreign aid is essential in meeting the capital needs of countries that need more resources. However, in the literature, besides the view that foreign aid encourages economic performance, opinions suggest that it has adverse effects on recipient countries. Some ideas argue that the positive impact of foreign aid in recipient countries depends on the institutional quality level of the nations. We examine the relationships between foreign aid, the quality of governance, and economic growth using the dynamic panel data analysis method. The empirical analysis includes samples of 78 low-income countries that used foreign aid from 2000-2019. According to the findings, foreign aid affects economic growth negatively in sample countries. In addition, we find a positive relationship between the quality of governance and economic growth. In line with these findings, we can state that improvements in governance quality will positively impact economic development in the sample nations.