Effectiveness of Foreign Aid: A Critical Assessment

Abstract

The studies on effectiveness of foreign aid have come through three generations and contain many arguments. Some experts charge that aid has enlarged government bureaucracies, perpetuated bad governments, enriched the elite in poor countries, or just been wasted. Others argue that although aid has sometimes failed, it has supported poverty reduction and growth in some countries and prevented worse performance in others. This paper explores the main arguments of the effectiveness of foreign aid and expounds the relationship between aid, growth and development. The findings of this paper reveal that the aid and growth during the last decade has found a positive relationship, in contrast to popular perceptions, particularly studies that have allowed for diminishing returns and have controlled for other factors that affect growth. However, it should be noted some studies have found that the aid-growth relationship is conditional on the policy or institutional environment, but many of those results have been fragile.