Foreign Aid – Blessing or Curse in Fragile States

Abstract

This paper analyses the effects of foreign aid on the economic growth in fragile countries. The study uses annual data on a group of 29 fragile states for the period 1991-2011. The hypothesis, that foreign aid foster economic growth in fragile states, was tested using GMM and TSLS estimations. Differences in income levels were taken into account while estimating models. Results showed positive relationship between aid and economic growth. However, in a separate model for middle income countries, coefficient on aid and squared aid are found to be insignificant in both GMM and TSLS estimation results. This study also found other factors that promote economy in fragile countries, such as savings and foreign direct investment.