When the aggregate effect of aid is estimated using a marginal productivity approach, a return on aid investment of around 20 per cent is found
The return on aid is like macro estimates of the return on public capital, and higher than the return on domestic private capital
Aid supports improved fiscal management and does not by necessity have a negative effect on domestic resource mobilization
While aid may have the potential to cause Dutch Disease, this is not automatic in the way suggested by the critics of aid
The death of aid has often been declared, and private capital flows as well as earnings from natural resources now far exceed official development assistance (ODA) in aggregate. However, the recent and sharp downturn in resource earnings, the ability of ODA to fund public goods that private capital cannot, and the difficulty of small and fragile economies in attracting private capital, all imply that the need for aid might not be as dead as its critics believe.
However, despite this continued need for aid, its supply may well stagnate or fall. With donor budgets under pressure, criticism of aid reinforces those calling for aid to be scaled back (or ended). Some criticism of aid is based on robust evidence, and aid has had its shortcomings. But much popular criticism of aid rests on no evidence at all, on out-of-date studies, or on a misunderstanding of causation and country context.
The aggregate return on aid
In 1986, Paul Mosley noted a micro-macro paradox in aid effectiveness; while evaluations of aid projects found significant success, these successes did not appear to aggregate up to the macro level due to the seeming lack of a significant effect of aid on economic growth in his analyses.
However, new research shows that when the aggregate effect of aid is estimated using a marginal productivity approach, a return on aid investment of around 20% is found. This is similar to the rate of return on projects (so no micro-macro paradox exists) and to macro estimates of the return on public capital, and higher than the return on domestic private capital.
Evidence that aid investments are productive is encouraging given the allocation of aid resources for infrastructure projects and it demonstrates the beneficial effects of aid. However, not all aid finances physical capital Investment--indeed probably less than half does. A significant share of the aid delivered through government finances social sector or human capital...