consumption rate in comparison to the entire income tends to be relatively higher than that of other income groups.

The T/GDP, a measure of trade openness, was included to determine whether economic policies on international integration would affect growth in aid recipients. Numerous studies suggest that openness of trade is highly correlated with economic growth. Trade is believed to promote industrialization and enhance technological progress, providing learning opportunities for developing countries, which eventually positively influence economic growth. At the same time, trade volume tends to become larger in some developing countries mainly because of the increasing importation of consumption goods. How much of the benefit of liberalized trade can be derived for growth varies among countries. Taking this into consideration, the impact of trade is expected to be neutral; it depends on many factors.<sup>8</sup>

**_Institutional Variables:_** Institutional quality was incorporated as a variable of interest. Many previous studies used an institutional quality index, where particular indices were taken from the International Country Risk Guide (ICRG) indicators (PRS Group, 2012) to define their institutional quality, such as quality of bureaucracy, rule of law, and expropriation risk. Considering the capacity of the recipient country key for development effectiveness, we used the variable of institutional quality which indicates capacity of the government. A country with good institutions, especially capacity, can manage both public and private activities efficiently, which brings about positive effects on growth, as well as development effectiveness. With many previous studies having confirmed the positive relationship between institutional quality and growth, the expected sign of the coefficient is positive.

# **_Exogenous Variables (X)_**

The fertility rate and average rate of change in terms of trade (TOT) were added as exogenous variables. These variables are considered to be exogenous, or not correlated with other selected variables, while they have explanatory power for growth.

**_Regional Dummies:_** The current study (for Eq. 1) used three regional dummies:<sup>9</sup> East Asia and the Pacific (EAP), Sub-Saharan Africa (SSA), and the Former Soviet Union (FSU),<sup>10</sup> with other regions treated as the base. EAP (or only the East Asian countries) and SSA regional dummies are the ones most often used together in aid-growth empirics (Burnside & Dollar, 2000, 2004; Dalgaard et al., 2004; Rajan &

> 8 The high correlation between trade and institutional quality should be carefully considered in cross-country analyses. Rodriguez and Rodrik (2001) claimed that trade might simply act as a proxy for a variety of other important policy and institutional variables. As a consequence, once the institutions are controlled for, integration/trade has no direct effect on income.

> 9 We assembled a full set of regional dummies in the database corresponding to the World Bank’s classification: East Asia and Pacific (EAP), Europe and Central Asia (ECA), Latin America and the Caribbean (LAC), Middle East and North Africa (MNA), South Asia (SAR), Sub-Saharan Africa (SSA), and Former Soviet Union (FSU). These are used for robustness check.

> 10 The current study used the FSU as a regional designation rather than the ECA that includes the FSU, as the FSU had more significance. This is consistent with the judgment of Burnside and Dollar (2004).

9