Foreign Aid Effectiveness: What Type of Spending Matters for What Outcome

The effectiveness of foreign aid measured by Official Development Assistance has been a controversial issue since 1960s. In this thesis, I disaggregated the components of the total net ODA, focusing on foreign aid for the health, education, economic infrastructure and production sector, and government and civil society using data from 110 countries between 1995 and 2014. Furthermore, I disaggregate health, education, economic and government aid data into grants and net loans allowing the effect of each component to differ. I find that an annual health grant of one percent of GDP decreases infant mortality by over 3% and increases life expectancy by approximately 2% over the five years but found no significant effect of health loan on health outcomes. This may be due to the reason that about 85% of the average health aid (averaged over 1995-2014 for all countries in the sample) is health grant and the remaining 15% is health loan. However, the positive effect of health aid on life expectancy does not imply a positive relationship of health aid and GDP per capita since I find that 1% increase in life expectancy is associated with approximately 0.9% increase in population considering the general equilibrium approach. Moreover, the average health aid is considerably large compare to their governments’ average public health expenditure (including borrowings and grants from international source) for some countries in South of Sahara region, raising a concern for aid dependency. The results for education outcome suggest that an annual education grant of one percent of GDP is associated with 7% increase in years of schooling over the five years but found no significant effect of education loan on education outcome. However, I find negative relationship of economic aid and investment while positive relationship of aid for government, civil society and rule of law is detected.