Growth, Poverty and Development Assistance: When Does Foreign Aid Work?

Abstract

This is a survey paper on aid effectiveness in terms of the contribution of development assistance to economic growth and poverty reduction. The article focuses primarily on the most recent generation of cross-country studies. It concludes that there is a set of broad areas where the evidence reviewed shows signs of convergence that have direct relevance for policy decisions on aid and for aid-effectiveness discussions. These areas are: aid levels (meaning if the level of aid is too low or too high); domestic political institutions (including political stability and the extent of decentralisation); the composition of aid (including sectors, modalities, objectives and time horizons); and the volatility and fragmentation of aid. We also identify two areas where there is little sign of convergence in the evidence: the importance or otherwise of 'good', meaning orthodox macroeconomic policies and whether grants are more effective than loans.