Aid, Policy and Growth: A Sensitivity Analysis
In discussions about the macro effects of aid, the analytical literature normally deals with two questions: the first deals with the criterion/criteria which should be used to assess the effectiveness of aid and once this issue is settled, the second issue is what methodology to use to verify whether aid has indeed been effective. As for the first question, aid is considered to have been effective if it leads to an increase in the rate of saving and/or investment and/or the rate of growth of real per capita income. The second question is answered by either specifying ad hoc single equation models of saving, investment or growth in which aid appears as one of the determinants or by deriving the single estimating equation from some explicit growth model along with testable hypotheses or by specifying simultaneous equation models where the equations may have some grounding in optimization models or be based on the standard approaches to macro model building in which the determinants are justified on a case by case basis and the simultaneities are accounted for by the individual behavioural and definitional equations. Since virtually all of the macro literature on aid is devoted to assessing the real life effectiveness of aid, the theoretical models underlying the estimated reduced form equations often play little substantive role as this brief survey will make clear.
KeywordsCapital Inflow Average Annual Growth Rate Balance Growth Path Growth Regression Focus Variable
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