Macro Aid Effectiveness Research: A Guide for the Perplexed - Working Paper 135

December 10, 2007

Like many public policy debates, the discussion about whether foreign aid works takes place in two worlds. Within the research world, it plays out in the form of papers full of technical language, formulas, and numbers. Outside, the arguments are plainer and the audience broader, but those academic studies remain a touchstone. While avoiding jargon, this paper reviews recent, contending studies of how much foreign aid affects country-level outcomes such as economic growth and school attendance rates. Such studies are ambitious: it is far easier to evaluate a school-building project, say, on whether the school was built and children filled its seats than to determine whether all aid, or large subcomponents of it, improved national school enrollment or made the economy grow faster.

Because of its ambition, the aid effectiveness literature appeals to those hoping for clear answers on whether aid "works." On balance, the quantitative approach to exploring grand questions about aid effectiveness, which began 40 years ago, was worth trying and may be worth pursuing somewhat further. But the literature will probably continue to disappoint as often as it offers hope. The biggest challenge is to go beyond documenting correlations to demonstrating causation -- to show not just that aid went hand-in-hand with economic growth, but caused it. Aid has eradicated diseases, prevented famines, and done many other good things. But given the limited and noisy data available, its effects on growth in particular probably cannot be detected.

For a more technical look at the aid debate, especially the relationship between aid and growth, check out this companion paper, Through the Looking-Glass, and What OLS Found There

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