that one of the reasons for the ambiguous results in past aid-growth literature comes from the usage of aggregate aid data in their analyses. The insignificant, even negative, results should be regarded as natural because aid is not necessarily, or directly, targeted to produce economic growth. The purposes of aid are diverse depending on the programs or projects. The different effects of aid should be taken into consideration in the specification of the empirical analyses. Unlike most of the previous literature, this study employed sector-level data on economic aid, social aid, as well as aggregate aid, to test the impact of aid.

In addition to this more granular view, a re-examination of the aid-growth relationship with the latest data (up to 2010 in this study) is warranted by recent changes in practice. Burnside and Dollar (2004) elucidated these changes, suggesting, “past aid had been allocated indiscriminately with regard to institutions and policies that were critical for growth,” and “now aid is more systematically allocated to countries with sound institutions and policies.” (p. 21) Bourguignon and Sundberg (2007) also discussed changes in international aid architecture and aid allocation since the mid-1990s.

# **1.2 Do Institutions Matter for Development Effectiveness on Growth?**

Another unique aspect of this research is the focus on institutional quality. We argue that institutional quality, and capacity in particular, are key factors in determining the effectiveness of development aid (Hirano, 2014). Unlike past literature that focused on policy as the control factor, this study pays more attention to institutions (further explained in section 3.3) in the aid-growth empirical analysis. Having a good policy stance (in terms of monetary, fiscal, and trade policies) does not necessarily mean that countries are capable of creating good policy impacts or managing their respective economies effectively.<sup>1</sup> Further, policy stances can be changed or improved in a relatively short period of time, with or without external help. On the other hand, building institutions takes longer than policy changes to bring about effects on economic growth (Williamson, 2000), similar to the impact of aid in the long-run growth theory. However, it is precisely this institutional quality that is a more critical determinant of the effectiveness of aid, than policy, as the quality of institutions reflects long-term characteristics of countries that also affect policies and growth (Burnside & Dollar, 2000). Even with good policies, constraints remain, if there is an absence of good institutions. Further, institutions cannot be changed or improved easily until a country becomes self-reliant. In sum, while institutional quality is more challenging to change than policy, it is the more consequential when it comes to making aid effective.

> 1 Market-oriented policies were promoted through the implementation of structural adjustment as a form of aid for the debt crisis in the early 1980s. However, the structural adjustment was considered a failure in most countries, especially in Sub Saharan Africa, as the implementation of “good policies” did not trigger expected development. The failure of the structural adjustment in the 1980s led to greater importance being placed on institutions, which represent the internal efforts and management capabilities of a country, rather than policy stance, when providing development aid.

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