What do we know about aid's macroeconomic impact? An overview of the aid effectiveness debate

This paper reviews the academic literature on the macroeconomic impact of development aid, with a special emphasis on the question as to whether, as claimed by much of the empirical literature, aid does not increase growth. The inadequate theoretical foundation of models of aid's impact on savings, in particular their failure to consider economy-wide effects, make them a poor basis for conclusions about aid's impact. The combination of weak theory with poor econometric methodology makes it difficult to conclude anything about the relationship between aid and savings. The literature on the relationship between aid and growth suffers from similar problems. Country-level studies of aid's impact on a range of macroeconomic variables are required which may build on the relatively small existing literature in this area.

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