**4. Conclusions and policy recommendations**

Delta GNI was regressed versus the exogenous variables Delta ILE, ODA, and Polity2. Comparing the coefficients for the three variables with their variance (under brackets), for each specification of the model we find out that in the model with no lags, explaining 31.4% of the DGNI variance, the Polity indicator is the most relevant exogenous variable with DILE less rel‐ evant and ODA almost not relevant at all. In this case, ODA is also negatively correlated with the changes in GNI. In the second model with lagged DILE, that explains 24.2% of the variance, this lagged indicator becomes the most relevant of all showing us that changes in economic freedom take time to produce improvements in GNI. ODA still has an extremely low relevance but becomes slightly positive while Polity2 becomes the number 2 indicator in relevance, very close to lagged DILE. The third and fourth models with lagged ODA, that explain 32% and 31%, respectively, are still showing a low relevance for ODA but an even lower relevance for the nonlagged DILE. Polity2 remains the only important exogenous variable in the model.

The third model is the regression for a double differentiated series of life expectancy depend‐ ing on the same three indicators: ODA, DILE, and Polity2. Since the model has led to auto cor‐ related residuals, we have preferred using the EGLS white consistent method of estimating the parameters instead of Cochrane‐Orcutt. Since the volume of the database is high (472 observa‐ tions), EGLS will maintain similar properties for the estimators as per the regular OLS [19].

**Equation 1 2 3 4** Dependent variable DDPLE DDPLE DDPLE DDPLE Lags None DILE(−1) ODA(−1) ODA(−2)

(fixed cross‐section effects, white adjustment)

Constant 115.8896 0.001487 0.001832 0.001528

ODA 40.42955 −0.0000228 −0.0000289 −0.0000243

DILE 0.568132 −0.00015 −0.00007 0.0000458

Polity2 21.14402 −0.000049 −0.0000429 −0.000035

Adjusted period 2001 2014 2001 2014 2001 2014 2001 2014 Observations 472/40 472/40 472/40 472/40 Adjusted *R*<sup>2</sup> 0.316071 0.480624 0.546168 0.530581 Sum squared reside 45396716 0.001696 0.00189 0.001972 S.E. of regression 325.2996 0.002051 0.002099 0.002144 *F*‐statistic 6.182571 10.80471 14.49592 13.67543

Prob(*F*‐statistic) 0 0 0 0

(30.34444) (0.000171) (0.000146) (0.000114)

(50.97066) (0.00000318) (0.000003) (0.00000246)

(0.375682) (0.00016) (0.000128) (0.000099)

(7.068845) (0.0000173) (0.000012) (0.0000124)

Method Panel EGLS

148 International Development

The HDI dimension, education index, has been tested only for life school expectancy. Due to lack of relevant official data available, our models have not included the indicator: mean years of schooling, and this can be a negative factor influencing the empirical relevance to the tested correlations here. As statistical data provided by international institutions will be improved, we are convinced that the quality of the following research will become more rel‐ evant. However, our findings show some important facts. Surprisingly, life school expectancy is not improved in recipient countries by getting development assistance. Therefore, it might be possible that better education is rather home‐grown process, depending in a large extent by better domestic policies which take into account other cultural aspects in that particular region. The other two variables, ILE and Polity have also proved to have a very limited posi‐ tive effect on life school expectancy indicator. We observed also that economic freedom tends to be positively correlated in time with this indicator.

Related to the changes in gross national income, our findings in the model without lags reveal that Polity and ILE are the most relevant, while ODA is negatively correlated. In the model with lagged ILE, economic freedom becomes the most relevant factor that contributes to growth. Thus, after doing this sensitivity analysis, we can emphasize that a less authoritative regime and improved economic liberties in the previous years are the most important factors of the three in terms of the impact over the GNI growth. This confirms some other recent find‐ ings in the development literature that quality of economic and political institutions matter for growth in a strong manner. Since aid is still channeled in most cases to governments and public agencies in the developing countries there is a little chance to stimulate growth, but corruption and social inequalities. As economic theory suggests, markets represent a better way to allocate resources and increase the living standards of people.

Analyzing the impact of these three variables on life expectancy at birth, our findings are favorable to ODA, as the most relevant factor, followed by Polity and ILE. Thanks to the work of UN World Health Organization, global funds, and other NGOs, healthcare problems in Africa have been reversed in trends.

Our findings and conclusions might be helpful to aid policy makers. However, it is not the goal itself of the international institutions and Western governments to eradicate poverty that is being questioned here, but the means by which they intend to achieve their objective. For instance, by analyzing separately HDI components instead of focusing on the aggregate HDI, we have identified some areas in which aid helps the poor, and areas in which aid seems to be wasted.

In the first place, if the developed countries want to promote economic growth, as main engine for sustainable development or to eradicate poverty in Africa, they should help the poor to have markets not bureaucracy and interventionism. A good example comes from the British Development Agency and it is worthy to be mentioned here. In southern Ethiopia, coffee farmer Feleke Dukamo is getting a better price for his beans. "My coffee sells for nine times more than it used to," he tells the British development agency DFID. The farmer is benefiting from the Ethiopia Commodity Exchange, established in 2008 with support from the United Kingdom. Before the exchange was created, Ethiopia's 15 million smallholders had no way of knowing the market price for their coffee, so middlemen were able to buy their beans cheaply and then sell them for a big margin. The new exchange has changed that: it sends farmer's regular updates on coffee prices by text messages via a dedicated phone line, which receives 44,000 calls a day. The result is a fairer price. "Now I can aspire to a better life," says Feleke. "I've been able to buy some cattle and, as my farm grows, I can employ people to help bring in the harvest" [1].

This challenge takes time and cannot be done overnight. But the first step in the right direction is to generally admit that aid cannot buy growth, as Easterly emphasized [20]. Development agencies should be more specialized, focusing more on small number of tasks in specific fields. The holistic approach of collective responsibility of hundreds of agencies should be replaced by a more accountable approach of individual responsibility, such as transferring knowledge on banking systems, developing stock markets, promoting sound macroeconomic management, or stimulating business environment by simplifying business and trade regulations. Basically, the main goal for aid agencies is to identify proper actions to promote institutional reforms favorable to free markets and fair competition in recipient countries. Simply giving money to a large number of national government bureaucracies helps public administration and the ruling parties, not the people. Additionally, a more focus on the alternative aid channel involving NGOs, global funds or other social entrepreneurs could increase aid effectiveness.

Second, for the UN and development agencies, there is an important task to be focused on in the future. Many healthcare and nutrition problems in poor countries have been solved, even if partially, with the help of the West. According to Easterly, by giving the poorest people vaccines, antibiotics, food supplements, fertilizers, or roads does not mean we make the poor dependent on foreign aid. On the contrary, better health, better nutrition, and better education represent more opportunities for the poorest to escape poverty and get better living conditions.
