Aid and Growth: What Does the Cross-Country Evidence Really Show?
Raghuram G. Rajan
University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)
International Monetary Fund (IMF); Center for Global Development
IMF Working Paper No. 05/127
We examine the effects of aid on growth - in cross-sectional and panel data - after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, do not imply that aid cannot be beneficial in the future. But they do suggest that for aid to be effective in the future, the aid apparatus will have to be rethought. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness.
Number of Pages in PDF File: 49
Keywords: Aid and Growth, Cross-Sectional and Panel data
JEL Classification: 01, 040
Date posted: March 3, 2006