Does Aid Improve Economic Institutions?

Aid is expected to promote better living standards by raising investment and growth. But aid may also affect institutions directly. In theory, these effects may or may not work in the same direction as those on investment. This paper examines the effect of aid on economic institutions and finds that aid has neither a positive nor a negative impact on existing measures of economic institutions. These results are found using pooled data for non-overlapping five-year periods, confirmed by pooled annual regressions for a large panel of countries and by pure cross-section regressions. We explicitly allow for time invariant effects that are country specific and find our results to be robust to model specifications, estimation methods and different data sets.

Keywords: Aid; Economic Institutions; Dynamic Panel