Foreign Aid's Impact on Economic Growth: Conditional on Accountable Institutions?

This paper studies the impact of foreign aid on economic growth in Latin America and the Caribbean and determines whether this relationship is conditional on institutional quality, utilizing an index of accountability. I examine whether or not accountability structures rather than fiscal policies as used in Craig Burnside and David Dollar's 2000 article Aid, Policies, and Growth are a better determinant for overall economic growth. Using a database spanning 1996 to 2008, this paper examines the relationship between foreign aid and economic growth in 19 Latin American and Caribbean countries and seeks a clear definition of institutional quality. The findings of this study fail to indicate a significant relationship between foreign aid, institutional quality, and economic growth. The results show a negative relationship between the accountability index and economic growth in the region. This indicates the need for further research on uncovering the vague concept of institutional quality and good governance. Surprisingly, economic growth in Latin America may be positively affected by more authoritarian institutions such as state-owned banks, strong executive leadership, less press freedoms, and those that can control monetary and fiscal policies to provide for smooth economic environments.