Estimating aid-growth equations: the case of Pacific island countries

Abstract

The seminal but controversial work of Burnside and Dollar (2000) has been the basis for much empirical research on the growth effects of development aid. This article argues that the specifications adopted in these works are not consistent with the data and the statistical techniques used. A modified production function is proposed in which total factor productivity depends on time as well as the aid ratio. Our empirical results show that the effect of aid on the steady state growth rate is insignificant in the selected Pacific island countries. These countries are of interest because they are among the largest recipients of aid in per capita terms.