Effectiveness of Foreign Aid and Institutional Quality on Economic Growth in Developing Countries

Foreign aid as a stimulant for economic reform in developing countries has been questioned in recent years due to the lack of increases in per capita income. However, during this time, the quality of the institutions receiving aid has been viewed as more important. It has been theoretically hypothesized that a country will grow economically if they have good institutions and receive sufficient funding through foreign aid. This paper empirically analyses both the aid and institutional quality variables individually on the growth of a developing country. Additionally, these variables have been analyzed as an interaction variable on the dependent variable. It has been concluded that aid will stimulate economic growth within a country, holding everything else constant. Additionally, institutional quality will have a positive effect on economic growth, ceteris paribus. However, it is not necessary for a country to have both of these things simultaneously. It has also been concluded that there is a nonlinear relationship between aid and growth. Therefore, aid is only beneficial up to a certain point. If too much aid is granted, it can have detrimental effects on the economic growth of a developing country