Does Aid Work? New Evidence from Recent Empirical Studies

Abstract

The main message of the Assessing Aid report of the World Bank (1998) is that aid is effective in stimulating economic growth, but only when the government policies of the recipient country are good. Donor countries have picked up this message and have used it to become more selective when making countries eligible for aid. We review the empirical literature that has contested the main conclusions of the report. According to our review, the critics convincingly show that the conclusions are based on fragile econometric evidence. Moreover, they criticise the measurement of good policy by the World Bank. The critics also come up with alternative explanations of the effectiveness of aid, such decreasing returns of aid and the importance of geographical or climate-related circumstances. Based on our review, we conclude that donors that have based their policies on the results of the Assessing Aid report should reconsider their policies of aid selectivity and use other criteria than good policy.

Keywords: development aid, effectiveness, economic growth

JEL Classification: F35, O40