Foreign aid, institutional quality, and growth

- Study a panel of 116 countries, 1970-2010
- Aid flows negatively affect political and economic institutions.
- Only economic institutions are robustly correlated with growth.
- Standard deviation aid increase, via institutions, may reduce annual growth by 2%.

Using a panel of up to 116 countries from 1970 to 2010 we estimate the effects of foreign aid flows on a variety of measures of institutional quality. We find that aid flows are associated with the deterioration of both political and economic institutions. Regarding the latter, aid flows are associated with deterioration in a recipient's legal system and property rights, as well as its openness to international trade. Controlling for both political and economic institutions in growth regressions, the latter is robustly, positively associated with growth. After controlling for institutional quality, aid flows are not otherwise significantly related to growth.