Aid, Policies, and Growth: Bauer Was Right

Although Bauer’s influence has been powerful, it has not been pervasive. There appear to be some in the economic development community on whom his message seems not to have made even a dent. A case in point is the much-acclaimed study by two World Bank economists, Craig Burnside and David Dollar (2000, henceforth BD). Relying on a panel data set of 56 countries over six 4-year periods (beginning with 1970–73 and ending with 1990–93), the authors use regression analysis techniques to examine the relationship between national economic growth, national economic policy, and foreign aid received. More precisely, they regress the growth rate of real GDP per capita on various combinations of regressors, with the basic specification including an index of the quality of national economic policy, a measure of foreign aid, and an aid-policy interaction term. Their two principal findings are (1) the estimated coefficient of aid is negative but not statistically significant, and (2) the estimated coefficient of the aid-policy interaction term is positive and signifi-