Aid, Investment and Incentives

Promoting productive investment and economic growth are among the key objectives of most aid organizations operating in poor countries. However, it is not possible to conclude from existing empirical evidence that aid contributes positively to growth. In this paper, it is shown that those rather negative results may be explained by important incentive problems built into the aid system itself. The recipient countries' own efforts to contribute to investment and growth may, in reality, be undermined and the result may be aid dependency.