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Development Aid

“Izandla ziyagezana” - “Hands Wash Each Other”

Consistent with other authors, we found that on average aid has had little impact on
growth. However, a robust finding was that aid has a positive impact on growth in a good

policy environment. This effect goes beyond the direct impact that the policies
themselves have on growth.
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Finally, we assessed what we consider to be an interesting counter-factual. Suppose

more aid were allocated on the basis of policy rather than on the basis of donor interest,
while leaving the total quantity of aid, and the policies of recipients, unchanged.
Our results suggest that this would raise the mean growth rate in our sample of poor

countries from 1.10% to 1.44%.“
"Aid, Policies and Growth" 445
Craig Burnside and David Dollar
Macroeconomics and Growth Division
Policy Research Department, World Bank
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“ Rich countries gave more than $130 billion to official development assistance in 2014.
Over the last five decades, western donors spent $4.14 trillion – the equivalent of more

than seven times the 2014 GDP of Nigeria. These flows are topped up by support from
non-governmental organisations and other private charities, and so-called new donor

countries. Yet, in many of the developing countries receiving the aid, poverty still looms
large, and underdevelopment persists.

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Despite a large number of academic articles, this literature has not reached a consensus.

Researchers seem divided into ideological camps, each fighting for their model, with one
group claiming to show that aid works, and the other group pointing to a lack of

robustness of these results. The earlier literature is far from providing causal estimates
on how aid affects growth but rather shows (the lack of) correlations between the two.
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Estimating the causal effect of foreign aid on growth: Current evidence

Attempts to estimate the causal effect of foreign aid on growth can be divided into four
groups, all aiming to identify variables that affect growth only through aid (and use them
as instruments for aid).

One group relies on variables that are based on the size of the recipient country's
population to predict how much aid a country receives (e.g. Rajan and Subramanian

2008), a second uses past values of aid to predict current ones (and estimates difference
or system GMM regressions, e.g. Minoiu and Reddy 2010), and a third predicts aid with