Scandinavian Working Papers in Economics

Nationaløkonomisk tidsskrift,
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Does development aid help poor countries converge to our standard of living?

2007, Volume 2007, issue 1, pp. 188-214

Tryggvi Thor Herbertsson () and Martin Paldam ()
Additional contact information
Tryggvi Thor Herbertsson: Askar Capital, Reykjavík, Iceland
Martin Paldam: School of Economics and Management, University of Aarhus, Postal: Martin Paldam, School of Economics and Management, University of Aarhus, E-mail: mpaldam@econ.au.dk

Abstract: Aid flows are included in the standard convergence equation and estimated using cross-country, panel and GMM regression. Robustness of the result is tested by changing the model and by adding extra variables. The main results are: that absolute convergence and absolute aid effectiveness are both rejected, and conditional convergence is accepted. Aid has an activity effect in the short run, but conditional aid effectiveness is found to be dubious. Finally, we try to divide the countries into an A-group where aid is effective and a B-group where it harms. Several criteria for division are explored, but none are really successful – the most satisfactory is the one that divides countries according to income.

Keywords: poverty; aid

JEL-codes: A10

Language: Danish

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