The Relationship Between Aid and Debt: Preliminary Empirical Evidence

Preliminary tests are conducted on the Cahill and Isely (1998) model. In this model, the level of external debt is partially determined by foreign aid. Specifically, this model suggests that the level of external debt for an LDC is positively related to GDP and aid, but is negatively related to absorbtion. Preliminary empirical tests find support for this model, despite the fact there are serious data issues. However, support was not found for the proposition that aid is provided to keep LDCs stable. Because they are generally supportive, the results suggest that more detailed testing of the model is warranted. Future tests are outlined to address some of the shortcomings of these preliminary tests.