Does aid dependance worsen governance?
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Aid dependence has been linked in the literature with worsening quality of governance. Using Kaufmann et al.'s six dimensions of governance ( Voice and Accountability, Political Stability, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption). this article reinvestigates this relationship with new data and a more robust methodology. Under pooled Time Series Cross-Sectional (panel data) analysis, only the Rule of Law appears to have a negative relationship with aid, and at only the 0.10 significance level. To control for potential endogeneity and reverse causality, aid is lagged and subsequently instrumented. Potential omitted variables bias is controlled with a fixed effects model. Components of aid such as technical cooperation and average grant element are also explored. Findings suggest that aid can play a positive role when its components are considered and that the causal link between aid dependence and worsening quality of governance may be tenuous at best and sensitive to alternative specifications.
The article of record as published may be found at http://dx.doi.org/10.1080/10967490701515580
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