ODA and Economic Growth in Developing Countries: Grants vs. Loans

Purpose - This paper examines the growth response of per capita GDP, human capital, employment, capital stock and total factor productivity to official development assistance In particular, we investigate if effectiveness of official development assistance (ODA) effectiveness depends on the aid form (i.e. grants vis-à-vis loans) and ethnic fractionalization. Design/methodology/approach - This study is based on the 60 aid recipient developing countries over the period 1980-2015. The various panel regression analysis are adopted. Findings - First, Total ODA has a positive and significant impact with diminishing returns on per capita GDP growth, human capital growth, employment growth and total factor productivity growth. Second is that ODA in form of grants has positive and significant impact on growth variables while loans has the negative effect. Third is that ethnic fractionalization matters on the effectiveness of ODA on growth variables for developing countries Research implications or Originality - This paper is different from other researches in the following senses. First, channels through which ODA leads to growth are examined. Secondly, we assess the effectiveness of ODA disaggregated as ODA-grants and ODA-loans. Thirdly the conditionality of ODA effectiveness focuses on ethnic fractionalization