AN EMPIRICAL TEST OF THE AID-CUM-DEVELOPMENT HYPOTHESIS: SOME EVIDENCE FROM SOUTH AMERICA
THEOLOCOS HOMER BONITSIS
This chapter presents an empirical analysis of the dynamic relationship and causal ordering between economic aid and economic development in ten South American countries. The countries under study are Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru, Uruguay, and Venezuela. A well-known corpus of theoretical and empirical economic literature exists that considers economic aid to be a vehicle for achieving economic development. A seminal article by Rosenstein-Rodan presents a model for determining the necessary level of economic aid to achieve specific development targets. 1 Somewhat more technical approaches are formulated in Chenery and Bruno, 2 Chenery and Strout, 3 and McKinnon; 4 all view an external flow as encouraging economic development. In the latter two articles, economic aid serves two functions: to complement domestic savings and to cover the foreign exchange gap.
In the introduction to their text, Bhagwati and Eckaus note that in some countries such as Greece and Israel, aid was important to their development, while in other countries like Burma and Indonesia, which had refused aid, development stagnated. 5 However, Ohlin emphasizes that noneconomic motives often supersede development considerations when a donor decides on the quantity, distribution, and allocation of aid. 6 Wall takes a similar view. 7
In a classic rebuttal to the aid-cum-development hypothesis, Milton Friedman argues that economic aid is often only given when a country adopts a development program; such an approach, he asserts, confuses the objectives with the means of achieving economic development. 8 Friedman states that current industrialized economies developed without such conditionality and