FOREIGN AID AND DEVELOPMENT: LOOKING BEYOND THE GROWTH EFFECT

On the question of whether aid stimulates GDP growth, the profession provides inconclusive and often contradictory findings. While waiting for a stronger consensus, this paper analyzes the direct effect of aid on other non-monetary dimensions of development. I construct an index of social and human development similar to the UNDPi¯s human development index but which differs from it by excluding per capita GDP. Using both non-parametric and parametric methods, I find a negative relationship between aid and social development. After controlling for per capita income, the econometric analysis suggests that higher dependence on foreign aid worsens social and human development.