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The Macroeconomic Effects of Foreign Aid: A Survey

  • Philipp Harms


  • Matthias Lutz


Research on the macroeconomic effects of aid has expanded rapidly in recent years. In this paper, we provide a survey of this literature. We start by reviewing some theoretical models that suggest a positive impact of aid on investment and growth. We then discuss the empirical evidence, giving particular attention to the role of institutions and policies in determining aid effectiveness. As a general conclusion, we suggest adopting a more disaggregate perspective with respect both to different types of aid and to various aspects of governance.

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Paper provided by Department of Economics, University of St. Gallen in its series University of St. Gallen Department of Economics working paper series 2004 with number 2004-11.

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Length: 26 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:usg:dp2004:2004-11
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  1. Alesina, Alberto & Weder, Beatrice, 2002. "Do Corrupt Governments Receive Less Foreign Aid?," Scholarly Articles 4553011, Harvard University Department of Economics.
  2. Bacha, Edmar L., 1990. "A three-gap model of foreign transfers and the GDP growth rate in developing countries," Journal of Development Economics, Elsevier, vol. 32(2), pages 279-296, April.
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  4. Chang, Charles C. & Fernandez-Arias, Eduardo & Serven, Luis, 1999. "Measuring aid flows : a new approach," Policy Research Working Paper Series 2050, The World Bank.
  5. Collier, Paul & Dollar, David, 1999. "Aid allocation and poverty reduction," Policy Research Working Paper Series 2041, The World Bank.
  6. Peter Boone, 1995. "Politics and the Effectiveness of Foreign Aid," CEP Discussion Papers dp0272, Centre for Economic Performance, LSE.
  7. Easterly, William, 1999. "The ghost of financing gap: testing the growth model used in the international financial institutions," Journal of Development Economics, Elsevier, vol. 60(2), pages 423-438, December.
  8. Burnside, Craig & Dollar, David, 1997. "Aid, policies, and growth," Policy Research Working Paper Series 1777, The World Bank.
  9. Feyzioglu, Tarhan & Swaroop, Vinaya & Zhu, Min, 1998. "A Panel Data Analysis of the Fungibility of Foreign Aid," World Bank Economic Review, World Bank Group, vol. 12(1), pages 29-58, January.
  10. Galor, Oded, 1996. "Convergence? Inferences from Theoretical Models," Economic Journal, Royal Economic Society, vol. 106(437), pages 1056-69, July.
  11. Dollar, David & Svensson, Jakob, 1998. "What explains the success or failure of structural adjustment programs?," Policy Research Working Paper Series 1938, The World Bank.
  12. David Roodman, 2003. "The Anarchy of Numbers: Aid, Development, and Cross-country Empirics—Revised July 2004," Working Papers 32, Center for Global Development.
  13. Jensen, Peter Sandholt & Paldam, Martin, . "Can the new aid-growth models be replicated," Economics Working Papers 2003-17, School of Economics and Management, University of Aarhus.
  14. Finn Tarp, 2006. "Aid and Development," Discussion Papers 06-12, University of Copenhagen. Department of Economics.
  15. Tavares, Jose, 2003. "Does foreign aid corrupt?," Economics Letters, Elsevier, vol. 79(1), pages 99-106, April.
  16. Peter Boone, 1995. "Politics and the Effectiveness of Foreign Aid," NBER Working Papers 5308, National Bureau of Economic Research, Inc.
  17. Carl-Johan Dalgaard & Henrik Hansen & Finn Tarp, 2001. "On the Empirics of Foreign Aid and Growth," EPRU Working Paper Series 03-13, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Sep 2003.
  18. Rolf J. Langhammer, 2004. "Halving Poverty by Doubling Aid: Is There Reason for Optimism?," The World Economy, Wiley Blackwell, vol. 27(1), pages 81-98, 01.
  19. Hansen, Henrik & Tarp, Finn, 2000. "Aid and Growth Regressions," MPRA Paper 62288, University Library of Munich, Germany.
  20. Alberto Alesina & David Dollar, 1998. "Who Gives Foreign Aid to Whom and Why?," NBER Working Papers 6612, National Bureau of Economic Research, Inc.
  21. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May.
  22. Svensson, Jakob, 2003. "Why conditional aid does not work and what can be done about it?," Journal of Development Economics, Elsevier, vol. 70(2), pages 381-402, April.
  23. Azariadis, Costas, 1996. " The Economics of Poverty Traps: Part One: Complete Markets," Journal of Economic Growth, Springer, vol. 1(4), pages 449-96, December.
  24. P. Guillaumont & L. Chauvet, 2001. "Aid and Performance: A Reassessment," Journal of Development Studies, Taylor & Francis Journals, vol. 37(6), pages 66-92.
  25. Harms, Philipp & Lutz, Matthias, 2003. "Aid, Governance, and Private Foreign Investment: Some Puzzling Findings and a Possible Explanation," HWWA Discussion Papers 246, Hamburg Institute of International Economics (HWWA).
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  31. J. Svensson, 1999. "Aid, Growth and Democracy," Economics and Politics, Wiley Blackwell, vol. 11(3), pages 275-297, November.
  32. Oecd, 2002. "Aid volume, channels and allocations for poverty reduction," OECD Journal on Development, OECD Publishing, vol. 3(3), pages 33-46.
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  34. Hansen, Henrik & Tarp, Finn, 1999. "Aid Effectiveness Disputed," MPRA Paper 62290, University Library of Munich, Germany.
  35. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1008-38, October.
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  37. William Easterly & Ross Levine & David Roodman, 2003. "New Data, New doubts: A Comment on Burnside and Dollar's "Aid, Policies, and Growth" (2000)," NBER Working Papers 9846, National Bureau of Economic Research, Inc.
  38. Harold J. Brumm, 2003. "Aid, Policies, and Growth: Bauer Was Right," Cato Journal, Cato Journal, Cato Institute, vol. 23(2), pages 167-174, Fall.
  39. Robert E. Hall & Charles I. Jones, 1999. "Why Do Some Countries Produce So Much More Output per Worker than Others?," NBER Working Papers 6564, National Bureau of Economic Research, Inc.
  40. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
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