International Development Assistance and Economic Growth: the Case of Four Southeast European Countries

Abstract

The purpose of this paper is to examine the impact of international development assistance on economic growth in the case of four Southeast European countries, Albania, Bulgaria, the Former Yugoslav Republic of Macedonia and Serbia, during the period 1991-2010. Foreign aid as additive to domestic savings is expected to cause an increase in economic growth and domestic savings. Surprisingly, our empirical results do not support this hypothesis, since foreign aid is negatively related to domestic savings. These results are consistent with the notion that foreign aid transfers can distort individual incentives, and hence hurt savings and growth, by encouraging rent-seeking as opposed to productive activities.