Foreign aid and economic growth: the case of the countries south of the Mediterranean

Abstract

Mediterranean countries provide a test case for examining the effectiveness of foreign capital in promoting economic growth. Focusing on the supply side of the economy, the econometric model answers two questions, using available panel data from 1960 to 1996: does foreign aid have a positive impact on growth of per capita income? does aid substitute or complete domestic savings? Three significant results are found: aid efficiency is indirect, it is dependent on the way it will be transmitted to other exogenous variables, specially to savings and to FDI and thus, on the efforts of the Mediterranean countries to change in-depth their productive structure; aid must be differentiated, in its contents as well as in its objectives depending on the development model of the beneficiary country; aid must be more regular. Aid allocation south of the Mediterranean is often chaotic and caused by geopolitical logic.