INTERNATIONAL DEVELOPMENT ASSISTANCE EFFECTS ON ECONOMIC GROWTH: EVIDENCE FROM FOUR SOUTH EUROPEAN COUNTRIES

The purpose of this paper is to examine the impact of international development assistance on economic growth in the case of four Southeast European member states, Croatia, Estonia, Lithuania, Slovenia, that fall into two different innovation performance groups, during a maximum time period of 16 years (1995-2010), by following a behavioural equation of flows, not an accounting identity. 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. We have shown that both international net official development assistance and official aid received, as well as net bilateral aid flows from DAC donors, have no statistically significant effect on Gross Domestic Savings into two different innovation performance groups. In all four European member states, with different innovation performance, only per capita Gross Domestic Product is statistically significant. 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.