Making Progress on Foreign Aid

Foreign aid is one of the most important policy tools that rich countries use to help poor countries improve population well-being and facilitate economic and institutional development. The empirical evidence on its benefits is mixed and has generated much controversy. This article presents descriptive statistics that show that foreign aid to very poor countries accounts for very little of total global aid; reviews the evidence that foreign aid is often determined by the objectives of donor countries rather than the needs of recipient countries; argues that the evidence on the impact of aggregate foreign aid is hindered by problems of measurement and identification, which partly result from the heterogeneous nature of aid; and discusses recent studies using natural and randomized experiments to examine narrowed definitions of aid on more disaggregated outcomes.