Political Regimes and the Effects of Foreign Aid on Economic Growth

This paper investigates whether the effect of foreign aid on economic growth differs under different political regimes. On average aid is found to have a negative significant impact on growth in developing countries, although the effect seems to be quite fragile and varies substantially across regime type. In tinpot countries aid has very little impact on growth and the returns to aid as aid/GDP increases appear to be constant. But in totalitarian countries aid has a robust positive significant influence on growth, with a tendency for diminishing returns for an aid/GDP ratio in excess of 21.5%. The better effectiveness of aid under totalitarian system than under tinpot seems to persist even when the model specification or sample are changed. Aid has no significant impact on the improvement of human rights and human development indicators, but it does have some influence in reducing infant mortality. An implication is to combine aid programs with a long-term human rights constraint. (JEL F350, O230, O400) I am indebted to two anonymous referees and A.N.Wahid, the editor of the journal for many helpful and incisive comments and suggestions. Previous version of the paper was given at 2001 meeting of the Canadian Economics Association at McGill University, Montreal, Canada. I am grateful to the participants at the seminar.