Macro Aid Effectiveness Research: A Guide for the Perplexed

Abstract

Like many public policy debates, that over whether foreign aid works carries on in two worlds. Within the research world, it plays out in the form of papers full of technical language, formulas, and numbers. Outside, the arguments are plainer and the audience broader, but those academic studies remain a touchstone. While avoiding jargon, this paper reviews recent, contending studies of how much foreign aid affects country-level outcomes such as economic growth and school attendance rates. This particular kind of study is ambitious: it is far easier to evaluate a school-building project, say, on whether the school was built and children filled its seats than to determine whether all aid, or large subcomponents of it, made the economy grow faster. Because of its ambition, this literature has attracted attention from those hoping for clear answers on whether aid works. On balance, the quantitative approach to exploring grand questions about aid effectiveness, which began 40 years ago, was worth trying and is probably worth pursuing somewhat further. But the literature will probably continue to disappoint as often as it offers hope. Perhaps the biggest challenge is going beyond documenting correlations to demonstrating causation - not just that aid went hand-in-hand with economic growth, but caused it. Aid has eradicated diseases, prevented famines, and done many other good things. But given the limited and noisy data available, its effects on growth in particular probably cannot be detected.

Keywords: aid effectiveness