Nonlinearity in the Efficacy of Foreign Aid on Economic Growth

Abstract

This paper finds evidence of nonlinearities in the efficacy of foreign aid on a country’s growth using a cross sectional data set of 75 countries that received Official Development Aid between 1985 and 2013. Using a multivariate adaptive splines (MARS) model the findings suggest that, for low-income countries, the efficacy of foreign aid is not constant across the range of foreign aid. The results suggest that when foreign aid is large enough the efficacy of foreign aid switches signs from negative to positive. Higher levels of schooling in the recipient country appear to amplify this effect.