Aid Effectiveness in OIC Member Countries

What the paper says

1.Introduction(ProQuest: ... denotes formulae omitted.)Among the most controversial issues in economics stands the question of whether aid is an effective tool for development of aid countries. Mostly cited claim against is that aid creates dependency on it as a source of finance, most widely discussed by well-known authors as Easterly and Mayo (2014). They suggest that dependency on aid does not allow countries to develop independently and use their potential in a full capacity. Aid serves as a source of easy money that promotes corruption and discourages a competitive environment. However, Sachs (2009) and Stiglitz (2002) put forward the idea that aid was historically too low to have a sensible positive economic impact. In this context, they suggest that increasing aid volumes significantly, can bring aid countries to sustainable development path.Another strong claim against aid is that each country may have political or economic benefits for giving foreign aid. In this context, donors aid allocation strategies are divided into recipient and the donor models in the academic literature, McKinley and Little (1979); Gounder (1994); McGillicray (2003). It is a prerequisite to mention that since the establishment of the first development aid initiatives, donors' strategies to achieve development goals have evolved tremendously. OECD has grouped all development inflows into different types based on the source and the grant element of aid. Official Development Assistance (ODA) has higher grant element compared to the other types of aid and targets needs rather than interest (see, section 2 for the definition and classifications of aid). The largest chunk of papers studying aid-development linkage applied a neoclassical theory where aid flows are a source of additional capital in the growth model. Total aid flows data is most commonly used with the neoclassical approach but the methodology applied in this paper has been to use ODA classified by sectors. This methodology will be discussed further in the following sections.There is no consensus among macroeconomic researchers concerning the impact of aid on development. However, the implicative microeconomic studies have achieved influential conclusions. These studies have commonly found a positive association of aid with the well-being of people, through analysing the impact of certain aid programs to the consumption or spending patterns of a group of beneficiaries. These studies benefited from the data collected by NGOs, international organization and governments' through surveys following targeted local aid projects. There is a need to adopt another approach to understand the effectiveness of the disbursements allocated by countries toward all layers of different sectors in the country which comprise the largest share of development aid. Because it is difficult to gather information regarding received funds in detail and conduct similar macroeconomic research as implicative microeconomic studies.This study tries to contribute to better understanding aid-development linkage. It tries to answer the following questions: Is aid the proper tool for development in OIC countries? And what forms of aid are the most effective at addressing the socio-economic development in OIC countries? This study is unique because it has the following important components: it studies the impact of aid on social indicators such as health, education and standards of living, for which aid is addressed at the macroeconomic level. Therefore, it can combine them as an economic development indicator, unlike microeconomic level studies. Also, it has a specific focus on OIC member countries which are the largest development aid beneficiaries.The rest of the paper is structured as follows: The next section briefly analyses the aid structure by OIC regions. While section 3 reviews relevant empirical studies in the field, section 4 presents data and methodology and section 5 sets forth estimation results. …