Aid and Human Development: Is There A Role for Good Policy Environment?

This paper examines the role that official development assistance (ODA) plays in achieving human development outcomes in the presence of good policy environments. Using data from 96 low and middle-income countries for the period 1996-2014, the paper develops and tests static and dynamic panel data models controlling for potential endogeneity of aid and human development. In exploring the impacts of aid, indicators of economic, political and institutional governance were taken into account. With moderate differences across countries, results suggest that foreign aid is positively and significantly linked with, and hence facilitates, human development indicators. Also, the governance indicators influence human development. So, providing more aid is justified if better economic, political and institutional governance in the recipient countries can be ensured