Does foreign aid play a role in promoting economic development? Evidence from US aid

Does foreign aid always contribute to economic development in recipient countries? This question has never been fully addressed. Using data on US aid to 128 countries worldwide from 2000 to 2019, this paper examines the relationship between US aid and economic growth in recipient countries, and the moderating role of institutional quality and absorptive capacity in shaping this relationship. Different types of US aid are considered, including economic aid and military aid. The results show that the relationship between economic aid and economic growth is U-shaped, while military aid has a positive linear relationship with economic growth. Moreover, we find that the institutional quality of the recipient country negatively moderates the relationship between US aid and economic growth. Additionally, the absorptive capacity of the recipient country positively moderates the relationship between economic aid and economic growth, whereas the relationship between military aid and economic growth is not affected by absorptive capacity. • The US economic aid-economic growth nexus is U-shaped, while the military aid-economic growth nexus is positively linear. • The institutional quality has a negative moderating effect on the US aid-economic growth nexus. • Absorptive capacity has a positive moderating effect on the economic aid-economic growth nexus. • The military aid-economic growth nexus is not affected by the moderating effect of absorptive capacity.