Foreign Aid -- Economic Growth Nexus

Abstract

The purpose of this paper is to determine whether the United States’ current government spending on foreign assistance is efficient for the economic development of the recipient countries. The relationship between foreign aid and economic growth is a highly debated topic, as evidenced by its literature. Some believe that qualitative factors such as institutional quality may be the driving force behind economic growth in developing countries. Others have proved that factors such as institutional quality have no effect on the economic development of a nation at all. In my study, I analyze the relationship between disbursed U.S. economic aid and GDP per capita growth in developed countries from 2002 to 2021. I take into account the potential impact of institutional quality on the economic growth of developing nations. My results showed a positive relationship between GDP per capita growth and foreign aid. Additionally, institutional quality may have a positive influence on the economic growth of receiving countries. I used a primary regression to create three sub-regressions that show how institutional quality affects each income level: low income, lower-middle income, and upper-middle income. What I found is that voice and accountability affect low-income countries, rule of law affects lower-middle-income countries, and political stability and control of corruption affect upper-middle-income countries. This breakdown may be used to inform policymakers in the United States to reconsider their approach to foreign aid disbursement.