Aid
Aid and growth: have we come full circle?
Can aid foster economic growth in developing nations?
Authors:
C. Arndt (ed); S. Jones (ed); F. Tarp (ed)
Publisher:
World Institute for Development Economics Research (WIDER), 2009
Recent literature has been pessimistic to the ability of foreign aid to foster economic growth. This paper attempts to provide a balanced assessment of the recent aid-growth literature. It analyses Rajan and Subramanian's (RS'08) conclusion that there is hardly any systematic effect of aid on growth. It observes that, while aid may have very high returns at times, there is an emerging consensus that expectations surrounding the average potency of aid have been too high.
The paper also delves into framing the aid-growth debate in terms of potential outcomes, taking motivation from the programme evaluation literature. It reasons that this helps to clarify the conditions required for valid causal inference, and it motivates the application of robust empirical methods that have not been employed in the literature to date. The analysis starts from the RS'08 contribution and then relates the aid-growth problem to the evaluation literature.
Following the analysis, the paper concludes as follows:
- Our results show that aid has a positive and statistically significant causal effect on growth over the long run with point estimates at levels suggested by growth theory
- the methodological advances highlight the serious challenges that must be surmounted in order to derive robust causal conclusions from observational data
- the application of modern growth theory has raised optimism about the likely returns of foreign assistance. There is an increasing recognition that many of the key interventions pursued by foreign aid will result in positive growth outcomes over long time horizons
- our approach represents the most carefully developed empirical strategy employed in the aid-growth literature to date
- the bleak pessimism of recent aid-growth literature is unjustified and the associated policy implications drawn from the literature is inappropriate and unhelpful.
