Foreign Aid, Institutions, and Economic Performance in Developing Countries

Although official development assistance presents a solution for developing countries to overcome the lack of capital, there is no consensus in the literature on the effectiveness of foreign aid. Moreover, opinions claiming that aid can only affect growth positively under certain conditions see institutional quality as an essential aspect that boosts the positive impact of aid. This study examines the relationships between foreign aid, institutional structure, and economic performance for 80 countries in Europe, America, Africa, and Asia. It is found that official development assistance and the quality of institutional structure in the sample countries affect economic growth positively. It also provides some suggestive evidence showing that foreign aid has a positive effect on the institutional structure.