What effect does development aid have on productivity in recipient countries?

Development aid does not always positively impact economic growth. Instead, aid may decrease total factor productivity (TFP) and discourage the recipient country's own effort to grow. This study contributes to research on macroeconomic aid transmission channels by using panel data from 51 recipient countries over a 36‐year period and applying panel time‐series techniques. The main aim is to study the aid–productivity relation by analyzing the impact of different forms of aid (grants; loans; and bilateral, multilateral, and sector‐related aid) on productivity while accounting for institutional factors and economic policy. The analysis controls for endogeneity and autocorrelation to ensure consistent and efficient estimates. To examine possible vicious circles often attributed to aid, we run quantile regressions to determine the role of aid across productivity quantiles. We find evidence that aid reduced TFP through grants and bilateral aid from 1972 to 1999 and in all quantiles of the TFP distribution from 1972 to 2009. We also find differences in the impact of sector‐related aid, where aid is harmful in more productive countries.