The Effectiveness of Aid in Improving Regulations – An Empirical Assessment

The paper empirically assesses the impact of foreign aid on the change in economic freedom, which is closely related to the quality of regulations. We build on a relatively large panel of 77 developing countries and examine the period 2002 to 2012 using different econometric methods, including an appropriate instrumental variable approach. We find that highly targeted aid can be a driver of change: Sector-specific Aid for Business has a significantly positive impact on regulations across developing countries, but we do not find any effects for overall aid or aid directed at broad governance areas.