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Economic research on foreign aid effectiveness and economic growth frequently becomes a political football. But when a regression result is passed from one source to the next, context is often stripped away so that what the result means in public discussion is different than what the original research actually demonstrated.
Consider the revealing episode of how an academic paper on foreign aid influenced actual foreign aid commitments. The story starts with an academic study by Burnside and Dollar (2000), which circulated widely as a working paper for several years in the late 1990s before publication in the high-profile American Economic Review. The authors set out to investigate the relationship between foreign aid, economic policy and growth of per capita GDP using a new database on foreign aid that had just been developed by the World Bank. They run a number of regressions in which the dependent variable of growth rates in developing countries depends on initial per capita national income, an index that measures institutional and policy distortions, foreign aid and then aid interacted with policies. To avoid the problems that aid and growth may be correlated over periods of a few years, but not on a year-to-year basis, they divide their sample into six four-year time periods running from 1970-1973 to 1990-1993. In certain specifications, they also include variables for ethnic fractionalization, whether assassinations occurred, dummy variables for certain regions and even a measure of arms imports. In many of their specifications, they found the interaction term between foreign aid and good policy to be significantly positive, and they summarized (p. 847): "We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies."
I believe the Burnside and Dollar (2000) paper meets high academic standards and is intuitively plausible. Their conclusions are appropriately hedged, and the paper has become a healthy stimulus to further research. However, their paper also was the basis of a policy recommendation to increase foreign aid, if only other policies were good, without further testing of whether this result holds when expanding the dataset or using alternative definitions of "aid," "policies" and "growth." Their general finding was passed on from one...