Project Management

Democratic Reforms, Foreign Aid And Production Inefficiency

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Executive Summary

The authors construct an endogenous growth model and they employ empirical analysis to investigate the link between foreign aid and production inefficiency in the presence of different political orientations in the recipient country. Using a panel of 124 countries from 1971 to 2007 and the production frontier toolbox, controlling for unobserved heterogeneity, time horizons, the sources of aid, and the timing of aid impact, they document that foreign aid is associated with higher production inefficiency and that this inefficiency is reduced considerably if countries switch to democratic governance.

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