AId to Agriculture and Aggregate Welfare

In this paper, we focus on foreign aid-effectiveness in developing aid-recipient countries. By disaggregating total aid into sub-categories, we develop a model in which aid affects the welfare of the poor, as measured by a human development index. Our estimates (robust for different specifications) show that an increase in aid to the agricultural sector, one of our aid sub-categories, can improve the welfare of the poor, both directly and indirectly, through pro-poor public expenditure. Accordingly, more attention to the agricultural sector and reversing the decline in agricultural aid may improve the overall effectiveness of aid and achieve a sustainable transition out of poverty by increasing aggregate welfare.