In academic discourse, it has become almost ritualistic to begin a piece on foreign aid by highlighting the sharp controversies over its effectiveness as a tool to promote social and economic progress in developing countries. This has happened even though evaluations of development aid at project and sector levels have consistently pointed towards positive impacts. Instead, controversy has centered on the ability of aid to promote overall economic growth. In this domain, conclusions have varied from positive to perverse.
Aid promotes overall economic growth
This controversy is now receding, even if some dissonance can still be heard. The large majority of recent empirical studies find positive impacts with broadly comparable results for the effect of aid on growth. These studies suggest that receipt of foreign aid equal to 10% of GDP over a sustained period is expected to boost growth by approximately one percentage point on average.
The studies also emphasise that these growth impacts take a long time to materialize and that development assistance can have limited or even negative impacts on growth in the short run. For example, a successful drive to increase school enrollments may reduce the size of the labour force with negative implications for output. Similarly, successful programmes to reduce infant and child mortality initially have little effect on output while increasing population. The result is a relative decline in GDP per capita. In both of these cases, positive effects on output emerge with substantial time lags as a better educated and healthier workforce gradually emerges.
The finding of a positive impact, on average, of development assistance on growth is consistent with findings for other important socioeconomic indicators. Over the long-run, foreign aid has reduced consumption poverty; contributed to more rapid expansion of 'modern' sectors (industry) alongside a relative decline of agriculture's share in GDP; enhanced aggregate investment; and increased government spending with generally positive implications for a range of social outcomes.
Why did it take so long to figure this out?
Both aid volumes and their associated impacts are not large enough to be easily identifiable in macroeconomic data. And these not-so-large impacts often take a long time to be realized. Detecting the contribution of aid is further complicated by large fluctuations in growth and other outcomes that have been an inherent part of the experience...