On the Empirics of Foreign Aid and Growth

The present paper re‐examines the effectiveness of foreign aid theoretically and empirically. Using a standard OLG model we show that aid inflows will in general affect long‐run productivity. The size and direction of the impact may depend on policies, ‘deep’ structural characteristics and the size of the inflow. The empirical analysis investigates these possibilities. Overall we find that aid has been effective in spurring growth, but the magnitude of the effect depends on climate‐related circumstances. Finally, we argue that the Collier‐Dollar allocation rule should be seriously reconsidered by donor agencies if aid effectiveness is related to climate.