Does aid increase growth?

Abstract

Is aid effective in increasing growth rates of recipient countries? This is the burning question in any economic evaluation of aid effectiveness, yet there is no consensus on the answer. Recent advances in growth theory help us to identify the various mechanisms by which aid can increase growth, notably through increasing investment in physical and human capital. The empirical evidence has tended to focus on aid effectiveness by examining its impact as (physical) investment and, more recently, by considering the relationship between aid and government economic policy. There is an increasing body of evidence that aid does work, conditional on other variables in the growth regression.