Does Foreign Aid Work Well in Developing Countries? A Mediating Effect Approach

The purpose of this paper is to find the impact of the coefficient of aggregated and disaggregated aid in Asia, Africa and Latin America due to the causal mechanisms that transmit the effect through mediating variables such as investment, government consumption and import. We employed the fixed effect estimation procedure over the period of 1992-2016 with a sample of 29 countries.
African countries are experiencing a negative total effect of multilateral aid on GDP which mediate via import. In Latin American countries, ODA, which mediates through government consumption, induce a greater positive impact than aid that transmits from investment. In Asian countries, ODA, which mediates through government consumption, induce a less negative impact than aid which transmit from investment. When the amount of ODA mediates through the causal path of import, the positive impact of aid is reduced by around 27 percent in Latin America while the negative impact of aid is reduced by around 55 percent in Asia. In case of aid heterogeneity, bilateral aid induces relatively promising advantage for developing countries. Accordingly, even though we used a different approach and our estimates are therefore not directly comparable to those of Burnside-Dollar (2000), our findings are very consistent with their finding that ‘aid effectiveness is conditional on policy’.