“Each of the papers examined here embodies a set of choices about model specification and data [variable for "aid", timespan of study, periodisation etc...] All limit the scope of a strict interpretation of the results. A question of great importance for the literature is, how many of such implied assumptions can be dropped without harming the conclusions?

The results reported here suggest that the fragility found in Easterly, Levine, and Roodman (2004) for Burnside and Dollar is the norm in the cross-country aid effectiveness literature.

Does this mean that the various stories of aid effectiveness should be summarily dismissed? Are recipient policies, exogenous economic factors, and post-conflict status irrelevant to aid effectiveness? Are there no diminishing returns to aid? Is helping the neediest countries a hopeless task? No. There can be no doubt that some aid finances investment, and that domestic policies, governance, external conditions, and other factors these authors study influence the productivity of investment. Why then do such stories of aid effectiveness not shine through more clearly? The reasons are several.

Aid is probably not a fundamentally decisive factor for development, not as important as, say, domestic savings, inequality, or governance. Moreover, foreign assistance is not homogeneous. It consists of everything from food aid for famine-struck countries to technical advice on building judiciaries to loans for paving roads. And much aid is poorly used—or, like venture capital, is good bets gone bad. Thus the statistical noise tends to drown out the signal. Perhaps researchers will yet unearth more robust answers to the fundamental questions of aid policy. Or perhaps they have hit the limits of cross-country empirics. Either way, robust, valid generalizations have not and will not come easily. Despite decades of trying, cross-country growth empirics have yet to teach us much about whether and when aid works.”

Owen replies: Thanks, George. You can never have too much Roodman, in my humble opinion. As I hope I have made clear in my posts on this subjects, and in the discussion, I share his view that cross country growth regressions don’t tell us very much at all. But that means that they also don’t tell us what the aid sceptics claim to see in the data: that aid doesn’t work.

The aid sceptics want to have us believe that, although there is much micro evidence of individual aid projects and programmes being successful, that a big macro perspective tells us that there is no meaningful effect of aid on the rate of economic development. (This claim became known as the macro-micro paradox.) But if we believe that aid-growth regressions don’t tell us anything very much, or that to the extent that they do, the statistics seem on the contrary to suggest that aid leads to higher economic growth, then there is no macro-micro paradox, and the main claim of the aid sceptics is false.

Owen replies: Hi Roberto – These results absolutely do contradict Moyo’s claim that aid reduces the level of GDP. They show that aid increases the level of GDP. I am not aware of Easterly having claimed that aid reduces GDP, though in his book “Elusive Quest for Growth” he has a graph which shows growth falling as aid rises (figure 6.1). Unlike Moyo, Easterly knows that it would be too simplistic to conclude from this that aid reduces growth, though perhaps he wants to leave that impression.

I’m not a great believer in these statistical relationships. But people who claim that there is an inverse correlation, in which aid reduces growth, are themselves employing a highly simplistic form of this form analysis; what these papers show is that their simple analysis is wrong.

Owen replies: Roberto, with respect, I think you’ve misunderstood. According to the econometrics – if you believe them – aid at 10 percent of GDP does not lead to a one-off increase in GDP of 1 percent of GDP (as you describe); it leads to an increase in the growth rate of 1 percentage point (so, for example, the growth rate goes from 2% a year to 3% a year). That means that after ten years of aid, GDP would be a bit more than ten percent higher than it would be without aid.

I agree that there is a lot of potential to make more use of cash transfers. The world’s largest social safety net programme is here in Ethiopia, and it seems to work pretty well. That is one of the things aid can be spent on.

Of course growth and poverty reduction are not always corellated.

And hypothetically if all of the aid were spent on Mercedes Benzes that wold still contribute to economic growth (providing they were bought domestically)