School of Business and Economics

This paper contributes to the empirics of aid and growth by investigating whether aid modality matters in explaining its effectiveness. For this purpose, we include the four main aid modalities (project aid, financial programme aid, technical assistance grants and food aid) as explanatory variables in an endogenous growth model. Using the GMM-SYS approach to dynamic panel estimator we test the three main competing specifications in the aid and growth literature for a sample of aid recipient countries over the 1974-2001 period. We find that project aid exerts a positive and significant impact on growth, thus casting doubt on the so-called “micromacro paradox”. Our results also show that financial programme aid generally impacts on growth negatively, while the impact of non-financial aid, technical assistance grants and food aid, is statistically insignificant. We found, however, no evidence to suggest that policy enhances the growth effect of the aid categories. Our non-linearity tests suggest that only project aid is associated with diminishing returns. Finally, our results confirm the finding that climate related conditions affect the working of aid (project).