NCPA - National Center for Policy Analysis


March 31, 2006

Challenging the simplistic view that increased assistance from rich countries is likely to put many poor countries on the path to prosperity, a new study on the impact of foreign aid finds "little evidence" that it ever has a positive effect on economic growth.

In their study, co-authors Raghuram Rajan and Arvind Subramanian conclude that regardless of the situation -- for example, in countries that have adopted sound economic policies or improved government institutions -- or the type of assistance involved, aid does not appear to stimulate growth over the short or long term.

They found:

  • Food aid should typically not be expected to affect long-run growth while economic and social sector aid should because they lead to an increase in physical and human capital.
  • Similarly, aid from multilateral institutions might be expected to have a greater chance of achieving growth than bilateral assistance because it is less likely to be influenced by a political agenda.
  • There is little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth, and there is no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.
  • However, the findings relate to the past and 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.

The authors point out that their exhaustive analysis should not be taken as an argument that aid cannot ever help the growth of countries that receive it, only that there is "no discernible robust impact of aid on growth, positive or negative" in the past.

Source: Matthew Davis, "No Evidence that Aid Stimulates Growth," NBER Digest, February 2006; based upon: Raghuram Rajan and Arvind Subramanian, "Aid and Growth: What Does the Cross-Country Evidence Really Show?" National Bureau of Economic Research, Working Paper, no. 11513, August 2005.

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