Counting Chickens When They Hatch: Timing and the Effects of Aid on Growth

Abstract

Recent research yields widely divergent estimates of the cross‐country relationship between foreign aid receipts and economic growth. We re‐analyse data from the three most influential published aid–growth studies, strictly conserving their regression specifications, with sensible assumptions about the timing of aid effects and without questionable instruments. All three research designs show that increases in aid have been followed on average by increases in investment and growth. The most plausible explanation is that aid causes some degree of growth in recipient countries, although the magnitude of this relationship is modest, varies greatly across recipients and diminishes at high levels of aid.