Foreign Aid Literature Review

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CHAPTER TWO LITERATURE REVIEW 2.0 Introduction Over the past decades, the urge to increase foreign aid’s effectiveness has motivated numerous empirical studies to identify why aid programmes succeeds or fails. These studies underpinned the donor community’s attempt in the late 1990s to reform aid delivery, shifting from predominantly stand-alone projects and conditionality- led stand- structural adjustment programs toward partnerships and mutual accountability (World Bank, 1998). Besides research on the determinants of growth, recent work has examined the importance of institutions and good governance for aid effectiveness in recipient countries for example, Svensson 1999; Bumside and Dollar 2000, 2004 and Dollar and Svensson 2000), findings…show more content…
Does foreign aid raise economic growth? The answer is unanimous. There are studies in the empirical literature as seen later in this chapter that maintain that there generally chapter that maintains that there generally exists a positive relationship between aid and economic growth. Among such studies include Hadjimicheal et al (1995), Reddy and Minoiu (2006) and Burdary, Gemmell and Greenaway (1998). Some studies on the other hand have found that the positive relationship between aid and economic growth is not general but dependent on a number of factors. These main factors include the quality of policies (Burnside and Dollar, 1997); level of corruption (Svensson, 2000); type of political regimes (Boone, 1995) and absorptive capacity of the recipient economy (collier and Hoefflar,…show more content…
These theories were in the view that development assistance was important for these countries as capital formation played a great role in economic growth. The reason being that, these countries had few or insufficient private and public savings to finance large investments such as economic infrastructure. Furthermore, developing countries had few resolvers in form of foreign exchange to fiancé imports of machinery and other capital goods therefore, foreign aid was essential to fill the savings- investment gap and the trade gap by increasing investments and thus growth. However, from the 1980s, there have been varied objective of providing aid with expected benefits in terms of economic growth, poverty reduction, investments and public expenditures in services in recipient countries. Some of these advantages include. 1. Foreign aid in the form of technical assistance provides technical knowledge and skills which influences positively the development process. The technical knowledge and skills are expected to influence the development process by improving the quality of labour force (human capital) and fitting the skills

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