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 22: Aid, growth, policies and fragility

Mark McGillivray and Simon Feeny


The impact of aid on per capita income growth has been a particularly controversial topic among researchers and policy-makers alike. Most studies agree that growth would be lower in the absence of aid. This is evident from comprehensive literature surveys of aid and growth studies, including Hansen and Tarp (2000), Morrissey (2001), McGillivray et al. (2006), Mekasha and Tarp (2011) and Clemens et al. (2012). There is no such agreement in this literature regarding what might be described as the contingencies on which the impact of aid on growth is partially dependent. Debate over this topic is intensive and a failure to reach agreement over it is arguably the principal failing of the aid–growth literature owing to the potential guidance such agreement could provide for the selection of interventions aimed at improving aid effectiveness. Debate on aid–growth contingencies commenced after publication of the pioneering econometric investigation of Burnside and Dollar (1997, 2000). Burnside and Dollar multiplicatively interacted aid with a measure of policy, and found that aid only had a positive impact on growth in developing countries with good fiscal, monetary, and trade policies. Subsequent studies have sought to test the robustness of the Burnside and Dollar result, test for the relevance of different contingencies, or both. No study has been able to replicate the Burnside and Dollar result, and as such there is widespread concern in the research community over its robustness.

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