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What is the Aggregate Economic Rate of Return to Foreign Aid?

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  • Channing Arndt
  • Sam Jones
  • Finn Tarp

Abstract

Does foreign aid promote aggregate economic growth? In contrast to widespread perceptions, academic studies of this question have been rapidly converging towards a positive answer. We employ a simulation approach to (i) validate the coherence of recent empirics and (ii) calculate plausible ranges for the rate of return to aid. Our results highlight the long-run nature of aid investments and indicate the return to aid falls in ranges commonly accepted for public investments. We find no basis for the view that aid has a pernicious effect on productivity.

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  • Channing Arndt & Sam Jones & Finn Tarp, 2014. "What is the Aggregate Economic Rate of Return to Foreign Aid?," WIDER Working Paper Series wp-2014-089, World Institute for Development Economic Research (UNU-WIDER).
    • Handle: RePEc:unu:wpaper:wp-2014-089
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    Cited by:

    1. Tony Addison & Oliver Morrissey & Finn Tarp, 2017. "The Macroeconomics of Aid: Overview," Journal of Development Studies, Taylor & Francis Journals, vol. 53(7), pages 987-997, July.
    2. Blessing Chiripanhura & Miguel Niño‐Zarazúa, 2015. "Aid, Political Business Cycles and Growth in Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 27(8), pages 1387-1421, November.
    3. Tseday Jemaneh Mekasha & Finn Tarp, 2019. "A Meta-Analysis of Aid Effectiveness: Revisiting the Evidence," Politics and Governance, Cogitatio Press, vol. 7(2), pages 5-28.
    4. Blessing Chiripanhura & Miguel Niño‐Zarazúa, 2015. "Aid, Political Business Cycles and Growth in Africa," Journal of International Development, John Wiley & Sons, Ltd., vol. 27(8), pages 1387-1421, November.
    5. Carter, Patrick, 2017. "Aid econometrics: Lessons from a stochastic growth model," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 216-232.
    6. Roger, Lionel, 2019. "A replication of "The long-run impact of foreign aid in 36 African countries: Insights from multivariate time series analysis" (Oxford Bulletin of Economics and Statistics, 2014)," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 13, pages 1-53.
    7. Carl-Johan Dalgaard & Henrik Hansen, 2017. "The Return to Foreign Aid," Journal of Development Studies, Taylor & Francis Journals, vol. 53(7), pages 998-1018, July.
    8. Rachel M. Gisselquist & Finn Tarp, 2019. "Aid Impact and Effectiveness: Introduction and Overview," Politics and Governance, Cogitatio Press, vol. 7(2), pages 1-4.
    9. Shaomeng Jia & Claudia R. Williamson, 2019. "Aid, Policies, And Growth: Why So Much Confusion?," Contemporary Economic Policy, Western Economic Association International, vol. 37(4), pages 577-599, October.
    10. Muhammad Arshad & Sana Hameed Pasha & Naeem Akram & Nadia Hussain, 2023. "Estimating aggregate economic rate of return to foreign aid in Pakistan," SN Business & Economics, Springer, vol. 3(6), pages 1-19, June.
    11. Cohen, Isabelle, 2023. "Crowd in or crowd out? The subnational fiscal response to aid," World Development, Elsevier, vol. 164(C).
    12. Yifang Wan & Yunxian Chen, 2022. "China’s Foreign Aid and Sustainable Growth of Recipient Countries: Mechanism and Evaluation," Sustainability, MDPI, vol. 14(17), pages 1-17, August.
    13. Sultan Mehmood & Avner Seror, 2019. "The Political Economy of Foreign Aid and Growth:Theory and Evidence," Working Papers 19-10, Chapman University, Economic Science Institute.
    14. Ismahene Yahyaoui & Najeh Bouchoucha, 2021. "The long‐run relationship between ODA, growth and governance: An application of FMOLS and DOLS approaches," African Development Review, African Development Bank, vol. 33(1), pages 38-54, March.
    15. Heckelman, Jac C & Wilson, Bonnie, 2023. "Aid, Reform, and Interest Groups," MPRA Paper 118182, University Library of Munich, Germany.
    16. Holland, Dawn & te Velde, Dirk Willem, 2022. "The Macro-Economic Effects of UK Aid Returning to 0.7 per cent of GNI," National Institute of Economic and Social Research (NIESR) Discussion Papers 535, National Institute of Economic and Social Research.
    17. Martin Ravallion, 2014. "On the Role of Aid in The Great Escape," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 60(4), pages 967-984, December.
    18. Finn Tarp, 2018. "Vietnam: The dragon that rose from the ashes," WIDER Working Paper Series wp-2018-126, World Institute for Development Economic Research (UNU-WIDER).
    19. Tseday Jemaneh Mekasha & Finn Tarp, 2018. "A meta-analysis of aid effectiveness: Revisiting the evidence," WIDER Working Paper Series wp-2018-44, World Institute for Development Economic Research (UNU-WIDER).
    20. Michael Tribe, 2024. "Evolution in the aid delivery and aid effectiveness debate – A Working Paper," Working Papers 2024_06, Business School - Economics, University of Glasgow.
    21. Finn Tarp, 2018. "Vietnam: The dragon that rose from the ashes," WIDER Working Paper Series 126, World Institute for Development Economic Research (UNU-WIDER).
    22. Nadeem Abdulmalik Abdulrahman Aljonaid & Fengming Qin & Zhaoyong Zhang, 2022. "The Heterogeneous Impact of Sectoral Foreign Aid Inflows on Sectoral Growth: SUR Evidence from Selected Sub-Saharan African and MENA Countries," JRFM, MDPI, vol. 15(3), pages 1-45, February.
    23. Ines A. Ferreira & Vincenzo Salvucci & Finn Tarp, 2022. "Poverty, inequality, and growth: trends, policies, and controversies," WIDER Working Paper Series wp-2022-43, World Institute for Development Economic Research (UNU-WIDER).

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    More about this item

    Keywords

    Economic assistance and foreign aid; Economic development; Simulation methods (Economics); Rate of return;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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