Papers of Selected Institutes

The literature on the aid–growth relationship has recently been reinvigorated\udthrough the application of growth equations that seek to explain\udgrowth as a function of institutions, policies and aid. This approach has\udgenerally led to the conclusion that aid has contributed to growth, albeit\udwith decreasing returns. Some studies have found that there is only a positive\udrelationship between aid and growth when there is a favourable policy\udenvironment—a finding that has been used to provide a reason for the\udreallocation of aid to better-performing countries and an increased emphasis\udby donors on aid conditionality. It is unclear whether these conclusions\udapply to the Pacific island countries given their unusual features: notably,\udsmall populations, remote locations and a high level of aid. This paper\uddraws on the recent literature in examining the aid–growth relationship\udin seven Pacific island countries. A positive relationship between aid and\udgrowth is identified, although it is subject to decreasing returns. The study\udis unable to provide an adequate explanation for the role of institutions and\udpolicy in growth in the countries studied, or determine whether aid only\udcontributes to growth when favourable policy environments are in place