Foreign aid could promote economic growth in developing countries -- if it were given to the right ones, say researchers. But most aid goes to the wrong countries -- where it actually retards growth.

In a new study from the World Bank, "Assessing Aid: What Works, What Doesn't, and Why," authors David Dollar and Lant Pritchett found that aid from rich countries and multilateral institutions like the World Bank is now spent in an ineffective way -- that is, it does not promote growth.

But then the researchers grouped the countries that got aid into those with good economic policies -- low inflation, small budget deficits, openness to trade, strong rule of law and a competent bureaucracy -- and those with bad policies. They found:

• For the countries with good policies, aid equivalent to 1 percent of the recipient's gross domestic product, on average, led to a sustained increase of 0.5 percentage points in the country's annual growth rate.

• On the other hand, a similar amount of aid to countries with bad policies appears to slow growth by 0.3 percentage points a year.

• Analyzing 113 countries, they found the actual pattern of giving was the most wasteful: with aid more likely to go to countries with bad policies and fewer poor people, rather than developing countries with good policies but large populations of poor people.

Furthermore, they found that if the current aid budget went entirely to poor countries with better than average policies and at least half the population in relative poverty --of which there are about 32 countries, such as India -- would help an additional 50 million people a year. Thus 80 million people a year could be raised out of poverty at a cost of $450 per person compared to the current situation, which raises 30 million people out of poverty at a cost of $1,200 per person.

Source: "Making Aid Work," Economist, November 14, 1998.