Aid and growth: A study of South East Asia

The success of foreign aid in promoting economic growth in developing nations is an issue of considerable controversy. In this article, the effectiveness of aid in promoting growth in three South East Asian countries - Thailand, Indonesia and the Philippines - is empirically tested, using a simultaneous-equation model in which growth and savings are jointly determined. The results indicate that aid had an insignificant effect on the growth rates of the three nations during 1970-2000 and did not displace domestic savings. The findings appear valid for both before and during the Asian financial crisis and underline the importance of exports and foreign direct investment in the South East Asian growth experience.