Estimating aid-growth equations: the case of Pacific Island countries

The seminal and controversial work of Burnside and Dollar (2000) has been the basis for many subsequent empirical works on the growth effects of overseas development aid. This paper argues that the specifications used in these works are not consistent with the data and techniques used. We propose a modified production function in which total factor productivity depends on time as well as the aid ratio. Our empirical results show that the effect of aid on the steady state growth rate is insignificant in the selected Pacific Island countries. These countries are of interest because they receive the largest aid in per capita terms.