Foreign aid as a catalyst for improving productive capabilities in recipients

This article empirically investigates the impact of foreign aid on recipients' productive capabilities. Panel data consists of 86 countries covering the period 2003-2019. The novelty of this study is in linking aid to a new proxy for measuring productive capabilities-the economic complexity index. Because of its ability to predict future growth, economic complexity is valuable in gauging aid effectiveness. The findings show that foreign aid benefits the recipients' economic complexity, although the results are mixed when aid is disaggregated by sector and type at different income levels. Trade openness and foreign direct investment are additional factors affecting economic complexity.