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2008 AEC - Aid and Human Capital Formation: Some Evidence

30-Sep-2008

This paper uses panel data from a large number of developing countries, two measures of external aid, and a Dynamic Panel Data (DPD) estimator to investigate whether external aid has a significant effect on human capital formation in Less Developed Countries (LDCs). Specifically, we investigate whether external aid targeted to education or the health sector increases primary school enrollment and completion rates and whether aid to the health sector decreases child mortality rates. We find that aid has a significantly positive effect on primary school enrollment and completion rates. Similarly, aid to the health sector significantly decreases child mortality rates in LDCs. We find that aid to the primary education and health sectors are different from the effects of aggregate aid on outcomes in these sectors. We find no evidence of the fungibility of aid to primary education and health sectors in our sample.

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