Over one billion people across the globe live in extreme poverty, struggling to survive on less than one U.S. dollar per day. The persistently low levels of aggregate welfare and human development in developing countries have recently caught the attention of many politicians and social observers. As the developed nations and multinational organizations of the world are called upon to increase development assistance to these impoverished countries, a question must be asked: Will increased foreign aid effectively raise human development in developing countries? While many studies have analyzed the impact of development aid on economic growth in developing nations, few have addressed the impact of development aid on more comprehensive areas of development. Analyzing data on 87 developing countries from 1980 to 2000, this study employs two-stage least squares estimation to evaluate the impact of foreign aid on the Human Development Index (HDI), a composite index of development and aggregate welfare, while controlling for the level of pro-poor public expenditure within a developing country. In addition, an interaction term between foreign aid and a measure of macroeconomic policies is utilized to determine if economic policy has an impact on the effectiveness of development assistance. This study finds that greater foreign aid is associated with lower levels of HDI after controlling for GDP and pro-poor public expenditure. In addition, the study concludes that macroeconomic policies do not influence the level of HDI in developing countries.
Kumler '07, Todd J., "The Impact of Foreign Aid on Development and Aggregate Welfare in Developing Countries" (2007). Honors Projects. Paper 19.