Aid works: aid leads to economic growth

There have been several studies looking at whether aid results in economic growth, which all reach broadly similar conclusions. The most recent, and best study, is by my colleagues at the Center for Global Development. Like the other studies, it finds that aid has had a substantial positive impact on growth. On average, aid worth one percent of national income increases annual growth in the recipient country over the medium term by about a quarter of a percentage point a year. Because this higher level of income is maintained over time, $1 of aid leads to about $1.64 of additional wealth (measured as a net present value) for the recipients. Or, viewed as an investment in the growth of developing countries, the average rate of return from aid is at least 13%. It is true that, over the last thirty years, sub-Saharan Africa has received more than $200 billion in aid, and yet the continent has seen negative average growth, of about a quarter of a percent a year. But it does not follow that aid does not work. The analysis shows that, as a result of the aid, average growth was about 1 percentage point higher, each year, than it would have been without aid. In other words, Africans would be substantially worse off today, if it were not for the aid that they have received. The analysis finds that aid is somewhat more effective in countries with strong institutions; but aid is still effective (though less so) in countries with weak institutions. This study is in line with the consensus in a series of other papers looking at the relationship between aid and growth. This particular approach adjusts the aid figures to remove humanitarian and emergency aid, which would not be expected to be correlated with long-term growth, with the result that the relationship between aid and growth is found to be stronger (both larger, and statistically more robust) than some previous studies which used unadjusted aid data.

3 thoughts on “Aid works: aid leads to economic growth”

  1. Pingback: Tim Worstall

  2. What analysis?

    “aid worth one percent of national income increases annual growth in the recipient country over the medium term by about a quarter of a percentage point a year.”

    I do not believe this at all. Firstly there are far too many variables involved for this simplistic assertion to be true.

    Before we go any further in this dialogue this needs to be backed up.

    Just because a number of papers repeat the same assertion does not make it true. Show us the evidence to back up this assertion. CGD are not serious heavy-weight economists, they are lobbyists – bear that in mind.

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