Democratic Reforms, Foreign Aid and Production Inefficiency

Christopoulos, Dimitris and Siourounis, Gregorios and Vlachaki, Irene (2010): Democratic Reforms, Foreign Aid and Production Inefficiency.

Abstract

We construct an endogenous growth model and we employ empirical analysis to investigate the link between foreign aid and production efficiency in the presence of different political orientations of the recipient country. Using a panel of 124 countries from 1971 to 2007 and the production frontier toolbox, we document that regardless of income stratum, decade and type, foreign aid is associated with higher production inefficiency and that this inefficiency is reduced considerably if countries switch to democratic governance. Our study contributes to the aid literature by pointing to the institutional enhancement of the recipient countries through initially the adoption of democratic ruling practices.

• Item Type: MPRA Paper
• Language: English
• Keywords: Democratic reforms, foreign aid, production inefficiency, translog function
• Subjects: F - International Economics > F3 - International Finance > F35 - Foreign Aid; O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O43 - Institutions and Growth; D - Microeconomics > D2 - Production and Organizations > D24 - Production ; Cost ; Capital ; Capital, Total Factor, and Multifactor Productivity ; Capacity; C - Mathematical and Quantitative Methods > C0 - General > C01 - Econometrics

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