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Aid's Incomplete Trial: reconsidering the aid-growth paradigm in the macro aid effectiveness literature

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  • Hansen, Marc
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    Abstract

    The Macroeconomic Aid Effectiveness Literature (Macro AEL) has had a resounding effect both within the academic community and within the policy arena where its policy recommendations carry substantial weight. Although the empirical aspect of this literature has received substantial scrutiny, the fundamental practice of assessing the effectiveness of aid by measurement against its impact on macroeconomic growth, referred to here as the Aid-Growth Paradigm, has escaped a similar fate. Consequently this paper will focus on an analysis of the theoretical foundations upon which the empirically dominated Aid-Growth Paradigm is constructed and show that the lack of consensus that plagues the Macro-AEL could be a symptom of the underlying underdeveloped theoretical framework. Through an analysis of the theoretical growth models and the implicit assumptions on the causal channels connecting aid and growth this paper illustrates that the Aid-Growth Paradigm suffers from two correlated oversimplifications. The first is the implicit assumption that the only causal channel that connects aid to growth is simply and directly through consumption and investment and the second is the reduction of the purpose of aid, namely development, to the promotion of macroeconomic growth. A more comprehensive approach, Rigorous Impact Evaluation, is then outlined based on the shortcomings of the Aid-Growth Paradigm that will allow a more multidimensional and exhaustive evaluation of aid’s effectiveness.

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    Bibliographic Info

    Paper provided by Institut fuer Entwicklungsforschung und Entwicklungspolitik, Ruhr-Universitaet Bochum in its series IEE Working Papers with number 200.

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    Length: 25 pages
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:bom:ieewps:200

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    Postal: Institute of Development Research and Development Policy, Ruhr University Bochum, Universitaetsstr. 150, D-44801 Bochum, Germany
    Phone: +49.234.32-22418
    Fax: +49.234.3214-294
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    Web page: http://www.development-research.org/
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    Keywords: Aid effectiveness; Aid-growth paradigm; Rigorous Impact Evaluation;

    This paper has been announced in the following NEP Reports:

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    1. Henrik Hansen & Finn Tarp, 2000. "Aid effectiveness disputed," Journal of International Development, John Wiley & Sons, Ltd., vol. 12(3), pages 375-398.
    2. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
    3. Hristos Doucouliagos & Martin Paldam, 2005. "Conditional Aid Effectiveness. A Meta Study," Economics Working Papers 2005-14, School of Economics and Management, University of Aarhus.
    4. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
    5. Raghuram G. Rajan, 2005. "Aid and Growth: What Does The Cross-Country Evidence Really Show?," Working Papers id:54, eSocialSciences.
    6. Hansen, Henrik & Tarp, Finn, 2001. "Aid and growth regressions," Journal of Development Economics, Elsevier, vol. 64(2), pages 547-570, April.
    7. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2004. "On The Empirics of Foreign Aid and Growth," Economic Journal, Royal Economic Society, vol. 114(496), pages F191-F216, 06.
    8. Howard White, 2009. "Theory-based impact evaluation: principles and practice," Journal of Development Effectiveness, Taylor & Francis Journals, vol. 1(3), pages 271-284.
    9. C-J. Dalgaard & H. Hansen, 2001. "On Aid, Growth and Good Policies," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 17-41.
    10. Hristos Doucouliagos & Martin Paldam, 2009. "The Aid Effectiveness Literature: The Sad Results Of 40 Years Of Research," Journal of Economic Surveys, Wiley Blackwell, vol. 23(3), pages 433-461, 07.
    11. Craig Burnside & David Dollar, 2004. "Aid, Policies, and Growth: Reply," American Economic Review, American Economic Association, vol. 94(3), pages 781-784, June.
    12. Hristos Doucouliagos & Martin Paldam, 2005. "Aid Effectiveness on Growth. A Meta Study," Economics Working Papers 2005-13, School of Economics and Management, University of Aarhus.
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