The United Nations Millennium Declaration of 2000 mandated a substantial increase in development assistance in order to support its increased effort at poverty reduction on the part of developing countries (United Nations, 2000). One year earlier the heavily indebted poor country (HIPC) initiative had been enhanced to provide more debt relief more quickly to heavily indebted poor countries. Because much of the forgiven debt had been accumulated from concessional (multilateral and bilateral) loans, most of that debt relief would be recorded as official development assistance (ODA). Thus, not surprisingly, official development assistance more than doubled between 2000 and 2005 (from US$50 billion to $108 billion) and reached a real and nominal all-time high in 2011. Such a large increase in foreign resource flows suggests the potential for substantial increases in investment, consumption or both in aid-receiving countries. Whether this, in fact, happened (or to what extent it did) depends, in large part, on how much of those resources made it into the domestic economy (rather than being diverted into reverse flows). Some reviews of the literature on the relationship between aid, saving and investment suggest that while aid may have a positive overall effect on domestic investment it also appears to be at least a partial substitute for domestic saving – meaning that it supports a higher level of consumption (Hansen and Tarp, 2000; Doucouliagos and Paldam, 2006).
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