The Effectiveness of International Aid: A Generalized Propensity Score Analysis

Applying the generalized propensity score matching, we estimate the effect of international aid on country GDP growth based on a panel data of 73 aid recipient countries for the period 1960-2011. The matching permits us to select a set of country-year observations that to the largest extent resemble each other, thus substantially reducing the bias caused by cross-country heterogeneity. Another advantage of this analysis is that we provide the effect of aid over a continuous range of aid-receiving intensities, rather than estimating a single average effect. The does-response function appears to be a more precise description of the effectiveness of aid on development when there exists a nonlinear relationship between the two. We find a slightly concave increasing response of economic growth to international aid intensity. The optimal ratio of aid to country GDP is found to be about 6 percent, which corresponds to a 2 percent increment in country GDP growth rate