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A review of the impact of foreign aid on domestic saving

Workneh, Migbaru Alamirew and Francken, Nathalie (2015): A review of the impact of foreign aid on domestic saving.

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Abstract

This paper tried to review the main literature on foreign aid and domestic saving in developing countries between 2000 and 2013, both theoretical and empirical literature. The main arguments of scholars in this area are reviewed. There are two opposite arguments on how the foreign aid affects domestic saving. In one side, scholars argue that foreign aid can be stimulant for economic growth through domestic saving. On the other hand, other scholars strongly argue that rather than being stimulant for the economic growth and improve the life of the society, foreign aid may able the dictator governments in developing countries to finance their political regime and increases corruption. The inconsistency and disagreement on the impact of foreign aid may result due to the difference in estimation techniques, control variables, and the aggregate estimation for the whole developing countries and for a specific region like Sub-Saharan Africa since countries are very different in political ideology and governance, economic policy and social structures.

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