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Comparing the Effectiveness of Aid Policies on Economic Growth in LDCs

Johansson Rittemar, Moa LU and Svensson-Rotberg, Linnea (2024) NEKN01 20241
Department of Economics
Abstract
This study examines whether aid policies aimed at promoting national interests are more effective at generating economic growth in Least Developed Countries (LDCs) than traditional aid policies. Compared to traditional aid, these policies rely heavily on trade, as the effectiveness of foreign aid has long been under scrutiny. We assess the effectiveness of these aid policies by empirically investigating how much trade must increase to compensate for cuts in aid geared towards LDCs. We estimate a dynamic panel-data model using variables known to influence GDP growth, with data on LDCs from 1991-2022. The estimation employs the Arellano-Bover/Blundell-Bond method, known as the system-GMM. The findings of the empirical analysis suggest that... (More)
This study examines whether aid policies aimed at promoting national interests are more effective at generating economic growth in Least Developed Countries (LDCs) than traditional aid policies. Compared to traditional aid, these policies rely heavily on trade, as the effectiveness of foreign aid has long been under scrutiny. We assess the effectiveness of these aid policies by empirically investigating how much trade must increase to compensate for cuts in aid geared towards LDCs. We estimate a dynamic panel-data model using variables known to influence GDP growth, with data on LDCs from 1991-2022. The estimation employs the Arellano-Bover/Blundell-Bond method, known as the system-GMM. The findings of the empirical analysis suggest that aid policies that align both trade and foreign aid may be more effective than traditional aid policies, but only in the short run. In the long run, trade must increase by 4.028 percentage points to compensate for a one percentage point decrease in aid, indicating that trade is an ineffective substitute for aid in the long term. We can also conclude that prioritizing economic aid over social aid, which many countries with aid policies aimed at promoting national interests do, is less effective in generating long-run economic growth. (Less)
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author
Johansson Rittemar, Moa LU and Svensson-Rotberg, Linnea
supervisor
organization
course
NEKN01 20241
year
type
H2 - Master's Degree (Two Years)
subject
keywords
Economic growth, Aid policies, Trade, Least Developed Countries, Arellano-Bover/Blundell-Bond estimation
language
English
id
9159274
date added to LUP
2024-10-01 13:06:32
date last changed
2024-10-01 13:06:32
@misc{9159274,
  abstract     = {{This study examines whether aid policies aimed at promoting national interests are more effective at generating economic growth in Least Developed Countries (LDCs) than traditional aid policies. Compared to traditional aid, these policies rely heavily on trade, as the effectiveness of foreign aid has long been under scrutiny. We assess the effectiveness of these aid policies by empirically investigating how much trade must increase to compensate for cuts in aid geared towards LDCs. We estimate a dynamic panel-data model using variables known to influence GDP growth, with data on LDCs from 1991-2022. The estimation employs the Arellano-Bover/Blundell-Bond method, known as the system-GMM. The findings of the empirical analysis suggest that aid policies that align both trade and foreign aid may be more effective than traditional aid policies, but only in the short run. In the long run, trade must increase by 4.028 percentage points to compensate for a one percentage point decrease in aid, indicating that trade is an ineffective substitute for aid in the long term. We can also conclude that prioritizing economic aid over social aid, which many countries with aid policies aimed at promoting national interests do, is less effective in generating long-run economic growth.}},
  author       = {{Johansson Rittemar, Moa and Svensson-Rotberg, Linnea}},
  language     = {{eng}},
  note         = {{Student Paper}},
  title        = {{Comparing the Effectiveness of Aid Policies on Economic Growth in LDCs}},
  year         = {{2024}},
}