Handbook on the Economics of Foreign Aid
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Handbook on the Economics of Foreign Aid

Edited by B. Mak Arvin and Byron Lew

It would be fair to say that foreign aid today is one of the most important factors in international relations and in the national economy of many countries – as well as one of the most researched fields in economics. Although much has been written on the subject of foreign aid, this book contributes by taking stock of knowledge in the field, with chapters summarizing long-standing debates as well as the latest advances. Several contributions provide new analytical insights or empirical evidence on different aspects of aid. As a whole, the book demonstrate how researchers have dealt with increasingly complex issues over time – both theoretical and empirical – on the allocation, impact, and efficacy of aid, with aid policies placed at the center of the discussion.
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Chapter 3: Aid and reverse flows: a global analysis

Anupam Das and John Serieux


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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