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

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  • Raghuram Rajan
  • Arvind Subramanian

Abstract

We examine the effects of aid on growth- in cross-sectional and panel data-after correcting for the bias that aid typically goes to poorer countries, or to countries after poor performance. Even after this correction, we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others. Our findings, which relate to the past, 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. Our findings raise the question: what aspects of aid offset what ought to be the indisputable growth enhancing effects of resource transfers? Thus, our findings support efforts under way at national and international levels to understand and improve aid effectiveness.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/127.

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Length: 54
Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/127

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Keywords: Economic growth; Foreign investment;

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References

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  1. Durlauf, Steven N. & Johnson, Paul A. & Temple, Jonathan R.W., 2005. "Growth Econometrics," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 1, chapter 8, pages 555-677 Elsevier.
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