Aid Effectiveness: Looking at the Aid–Social Capital–Growth Nexus

The authors examine the impact of institutional quality and social capital on aid effectiveness. They find strong evidence that social capital and institutions enhance aid effectiveness. Moreover, once they account for the role of social capital and institutions, the impact of policies tends to disappear. These findings have important policy implications as they indicate that conditioning aid allocation on “good policies” may not lead to an optimal (or fair) allocation of aid, as countries with high social capital at the macrolevel could actually make good use of aid regardless of the quality of policy. This casts doubt on the conclusions in Burnside and Dollar (2000) and the policy lessons derived from their findings.