An Assessment of the Aid Effectiveness Literature and an Analysis of Aid Instrumentation

This thesis describes the history of aid donations and its economic and political foundations. The main aim of this thesis is to describe the aid effectiveness literature and the problems it faces answering the question how aid is related to growth. Aid is thought to stimulate growth as part of capital input into a country’s production function. Effectiveness of aid can be influenced by who donates aid and with what intention and how the results are measured. Also it can depend what type of aid is given and how well the recipient government policies are and how good the quality is of a country’s institutions. Main problem is the endogenous characteristic of aid in most growth equations and how to solve for this in order to find the true effect of aid on growth. Several instrumentation methods are examined and one of Bruckner (2011) is reproduced by his own database and of this author. The reproduction of the instrument for aid was unsuccessful using own data but a positive effect of aid on growth was found