Aid and Growth: What Does the Cross-Country Evidence Really Show?

IMF Working Papers, June 1, 2005

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Canonical URL: Aid and Growth: What Does the Cross-Country Evidence Really Show?

Authors: Raghuram Rajan, Arvind Subramanian
Publication date: June 1, 2005
Core question: Do aid inflows into a country affect its economic growth, once bias that aid goes to poorer countries or to countries after poor performance is corrected?

After correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance, the study finds little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth.
No evidence is found that aid works better in better policy environments.
No evidence is found that aid works better in better geographical environments.
No evidence is found that certain forms of aid work better than others.
The findings relate to the past and do not imply that aid cannot be beneficial in the future.
The findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers?
The findings support efforts under way at national and international levels to understand and improve aid effectiveness.

Data types: cross-sectional and panel data.
Estimation and technical approaches referenced in metadata and keywords include: GMM estimation method, least squares, aid-policy interaction term, coefficient estimate.
Subjects listed: Estimation techniques, Foreign aid, Government consumption, Income, Inflation.
Keywords listed: aid-policy interaction term, coefficient estimate, GMM estimation method, least squares, WP.
Limitations noted: Findings relate to historical evidence and do not preclude future benefits of aid under reformed approaches.

For aid to be effective in the future, the aid apparatus will have to be rethought.
Continued investigation and reform at national and international levels to understand and improve aid effectiveness are supported by the findings.
The study prompts targeted inquiry into which aspects of aid delivery or composition might offset the expected growth-enhancing effects of resource transfers.